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The Influence of Supply and Demand on the Housing Market


Date: September 18, 2023

Real estate, a tangible asset comprising properties and the land they stand on, is subject to the same forces of supply and demand that affect other assets like stocks and bonds. This dynamic relationship plays a pivotal role in determining housing prices. Let's delve into the intricacies of how the housing market is impacted by the fundamental economic principle of supply and demand.

The Law of Supply and Demand

Source: Mashvisor

At its core, the law of supply and demand explains how the interplay between the availability of a product or service and the desire for it influences its price. When demand for something surges, its price tends to rise. Conversely, when the supply outpaces demand, prices tend to fall. This is because scarcity drives up prices, while oversupply leads to unsold items.

In the world of economics, the theory of supply and demand is a fundamental concept. These two forces continually act upon each other until they reach a point of equilibrium—the price at which supply equals demand, all else being equal.

The Dynamics of Demand and Supply in Housing

  • Demand: As the price of housing increases, the demand tends to decrease, following the law of demand. Conversely, lower prices stimulate demand as consumers find it more affordable to purchase homes.

  • Supply: Higher prices incentivize producers to bring more housing units to the market, adhering to the law of supply. Conversely, a scarcity of housing resources can drive prices up as people compete for limited options.

Factors Influencing Housing Supply and Demand

Measuring supply and demand in the real estate market can be challenging due to the lengthy processes involved in constructing new homes or renovating existing ones. Real estate transactions also take time, making the market somewhat illiquid.

Several factors influence housing demand:

  • Interest Rates: Lower interest rates make it easier for people to take on mortgage debt, increasing demand. This is especially pronounced when housing supply is limited.

  • Economic Growth: A growing economy leads to increased demand as people have more financial capacity to buy homes.

  • Location: Proximity to amenities, urbanization, and gentrification all affect property values, leading to fluctuations in demand and prices.

  • Age and Maintenance: Older properties are typically cheaper but may require more maintenance, affecting demand.

  • Size: Property size and condition, including improvements like swimming pools or garages, impact pricing and market value.

  • Government Policies: Government initiatives, subsidies, and regulations can either encourage or discourage real estate investment and influence demand.

  • Natural Disasters: Properties located in disaster-prone areas tend to be cheaper due to perceived risk.

Understanding how these factors interact with supply and demand helps investors and homebuyers navigate the complex world of real estate. Additionally, keeping an eye on the broader economic landscape and government policies can provide valuable insights into future housing market trends.

The Philippines, like many countries, experiences these dynamics within its own unique context, making it crucial for investors and buyers to stay informed and make well-informed decisions when entering the real estate market.




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