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1DEMAND AND SUPPLY OF REAL ESTATE By Nino Josph Mihilli
LAW OF DEMAND2Thelaw of demandstates that the quantity demanded and the price of acommodityare inversely related, other things remaining constant. It states that demand decreases with increase in price and vice versa. Ineconomics, thelawstates that,all else being equal, as the price of product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases There are various other factors that affect the demand for real estateBased on these factors we can derive the equation for real estate D = f {D, I, P, Cb, Cr, T, Ti, Ps}D - demand for real estateI income of customersP price of housingCb cost of borrowingCr availability of creditT consumers preferenceTi investors prefernecePs - price of substitutes and compliments
DEMAND CURVE3
demand curve, shown in red and shifting to the right, demonstrating the inverse relationship between price and quantity demanded (the curve slopes downwards from left to right; higher prices reduce the quantity demanded).
LAW OF SUPPLY4
Law of supply states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versaThe law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale However, in examining the forces determining the supply curve, we need to analyze the factors upon which the supply of a good depends Factors determining the supply of real estate can be stated in the form of a supply function S = f {P, A, B, Cr, L}S- supply of real estate propertyP- price of propertyAvailability of landEfficient buildersCr- easy accessibility of creditL- skilled labours
SUPPLY CURVE5
The chart above depicts the law of supply using a supply curve, which is always upward sloping. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be will be P1, and so on.
INTRODUCTION TO THE REAL ESATE INDUSTRY6It comprises of four sub- sectors HousingRetailHospitality CommercialThe real industrys growth is linked to developments in theHospitality Entertainment ( hotel, resorts, cinema theatres) industries, Economic services ( hospitals, schools) Information technology (IT) enabled services ( like call centres) etc
WHAT PROMPTS A PERSON TO TRY HIS FORTUNE IN THE FIELD OF REAL ESTATE SECTOR?
7The first and foremost is that the real estate business is risklessSecond, the ever growing housing needs filled by low interestLast but not the least is investing in the sector `where everywhere else does can also be cited as one of the important factors leading to heavy investment in this sector
WHAT ARE THESE FACTORS WHICH DRIVE REAL ESTATE PRICES ?8
MAJOR DEMAND FACTORS THAT AFFECTS THE PRICE 9LOCATIONAMENITIESINFRASTRUCTURECOMMERCIAL REAL ESTATEDISPOSABLE INCOMEAVAILABILITY OF LANDAFFORDABILITYSTRUCTURECUSTOMIZATION
LOCATION10
Buildings, real estate and properties, located in commercial and market areas, hold higher value than their counterparts in the residential areasIt is common to find brokers quoting a higher price for buildings in well developed and approved colonies and areas as against those in the lesser developed and upcoming areasSimilarly buildings which are constructed on freehold land tend to command a higher valuation than those on leasehold plots
AMENITIES11The valuation of properties with better infrastructural capabilities and modern amenities are costlier than those which fail to provide proper Electric connections Telephone lines Water sewerage facilities Other infrastructuresCommunity centresChildren parksSwimming poolsgymnasiums Parking lots General storesValuation of property is clearly based on the availability of necessities and facilities connected with comfortable housing
INFRASTRUCTURE12Infrastructural development is one of the most important factors which influence real estate prices in USA The presence of roads, airports, flyovers, malls and bus terminals and other facilities in the vicinity of the property, helps in value escalation of the sameIt is a known fact that connectivity is one of the most important requirements for investors looking towards purchasing land or propertyThis leads to the concept which explains a rise in the valuation of property which is well connected to Entertainment hubsMedical facilitiesEducational institutionsRetail markets Business centresAlong with other day to day facilities
DISPOSABLE INCOME AND AVAILABILITY OF LAND13DISPOSBALE INCOMEProperties which are located in agricultural areas or those dominated by manufacturing units attract a lower price than those situated near the IT hubsThe valuation of property is in direct proportion to the quantum of disposable income in the hands of the purchaser or the majority of population in that area AVAILABILITY OF LAND In places where there is ample land available for residential purposes or development of real estate, the graph reflecting the valuation of property shows a slower rise than in areas where land is comparatively scarce.
AFFORDABILITY14Affordability refers to the cost incurred by the owner in the process of enjoying or retaining a property In layman's term, it is the term which establishes a relationship between interest rates, property prices and wagesIf any of above three variables reach their maximum level in a particular area, then the inhabitants start looking towards a better lifestyle elsewhere
STRUCTURE
15 THE VALUATION OF PROPERTY IS DEPENDENT ON THE Specifications of materials used Layout Design Durability Life cycle of the building
FACTORS AFFECT THE PRICE OF A PARTICULAR PROPERTY AREThe quality and cost of materials during constructionSizeCurrent rates of labour Frontage
OTHER PHYSICAL ATTRIBUTES THAT AFFECTS THE PRICE ARE Roof covering Height of the buildingType of foundation Waterproofing Plinth level also affect the price of a particular property
CUSTOMIZATION
16The cost of real estate becomes higher in the event of builders undertaking customization of residential space on the lines of the purchaser's requirements For example, some investors may want landscaped terraces or verandas connected with their apartments, upgraded kitchens, specifically designed internal stairways in duplex apartments, higher quality paint and flooring, or other user defined changesThis leads to an escalation in the ultimate price charged to the buyer Before making their real estate purchase decisions, investors should conduct an analysis of these drivers to get a fair valuation of the property that interests them Careful investigation and homework can lead to better returns, easy liquidity and more lucrative investments
SUPPLY FACTORS AFFECTING THE REAL ESTATE INDUSTRY17If there is a limited supply of real estate in the market, it will usually push the prices higherConversely, if there are a lot of properties in the market, the tendency is for the price to go downA balanced market will work well for both sellers and buyersEven if the supply is imbalanced, there are other factors that can make the real estate market performing wellBuilders for example are going to adjust their plans to avoid oversupply of new homes in their areaThe more they build, the lower the prices would be so they are not going to build and build without regard for the supply factorAnother thing that can balance the oversupply of housing is the availability of land Some regions do not have plenty of space for new housing so the risk of oversupply of properties in the market is not that high
DEMAND VERSUS SUPPLY18The higher the demand for real estate, the higher the prices would beDemand for real estate in a particular area is inversely proportional to its supply. As the supply or availability of real estate decreases, the valuation of property increasesChanges in population are the key drivers for demand. Along with an increase in the number of people inhabiting a particular area, the popularity of a particular locality in terms of people wanting to be a part of the locality also increases its price
IMPACT OF RECESSION ON REAL ESTATE Incompletion of previous projectsBad debtsLess demand in all segmentsCash starvation
BARRIERS IN GROWTH OF REAL ESTATE
EXPECTATIONS OF CUSTOMERS21Budget of the customerLoan amount sanctioned to the customersIncome returns from the propertiesLocality of the propertyProper drainage system facilitiesLocation of schools, hospitals, markets, bus stops from the propertyPrivacy of livingQuality of buildingAvailability of space for car parkingLocation of the floor of the houseVastu of the buildingPatta and other approval for buildingsSafetyApproach to buildingApproachability of brokersGifts for the purchases of houseDown payments and EMILocation of the recreation and nearby religious places
CONSTRAINTS OF BUILDERS22Accidents that recently happened in that particular localityExcess budgetLack of ventilation in the buildingNew government policiesInflationLocation of the recreation and religious centre near byFluctuations in GDP of the countryIncome of the peopleDemographic dividendAmbience of the propertySaturation of growth of the propertyRescission in the IT and manufacturing sectorChanging customer preferencesLevel of water table in that localityLocation of schools and colleges, office near byExpenses sent on approvalExpenses on free gifts and marketing
CONCLUSION23REAL ESTATE PARCELS ARE UNIQUE AND FINITEYou cannot fill a real estate supply shortage by manufacturing more identical units Each piece is different and there is a finite supply It's not a manufactured commodityThough you might be able to create more condos in a give space, the space itself is unique and cannot grow to accomodate a short supply
REAL ESTATE CANNOT BE MOVED TO FILL SHORTAGESIf there is a shortage of land for homes in a given area, you cannot move in more land to alleviate the shortage Real estate is where it sits. For this reason, it will always be a local commodity influenced by local conditions
Conclusion contd...24OVER-SUPPLY MEANS LOWER PRICES:Because of the first two items above, you can usually expect there to be a fall in prices when there is an over-supply of homes or land in a given area You cannot move the overage to another area to keep prices stableUNDER-SUPPLY MEANS HIGHER PRICES:If there isn't enough land or homes in a given area, then prices will almost always rise Even if there is the ability to construct more homes, the time delay cannot fill the demand and prices will rise Hence, economic theorists believe that when you have a large supply of something, such as housing, prices for that something often decline. Conversely, if supply of something like housing is limited, prices for that housing often increase. However, you could have a large supply of housing and if it's also in high demand prices might also rise.
