The theory of demand and supply is one the basic concepts of economics which form the backbone of the market economy. Demand is the quantity of a commodity that buyers in a market desire. The quantity demanded is how much of a product (good or service) that buyers are willing and able to purchase at a given price in the market. This interaction between the quantity demanded and the price gives the demand relationship. On the other hand, supply refers to how much the market can offer. The quantity supplied is the amount of a commodity that sellers are willing and able to bring to the market at a particular time for all the given prices to give the supply relationship. Demand and supply therefore, reflect the price of the commodity (Salvatore, 2011).
The quantity demanded of a commodity is affected by its price. When all other factors are held constant and the price of a normal commodity increases, the demand for it will reduce because now the consumer will have to pay more for it. The opposite happens when the price reduces while the other factors remain constant. This implies that price is inversely related to the quantity demanded. Increase in price causes a decrease in demand and vice versa.
Another factor affecting demand include changes in the disposable income of the consumer. When the disposable income of consumer increase, they are able to afford more of the commodity hence the demand will increase. Demand also increases when the quality of a good is improved and advertising of the product that will lead to consumers building brand loyalty. Other factors include seasonal changes, future expectations of changes in the price of the commodity, and changes in the prices of other related commodities. Commodities can be related as either substitutes or complements.
Supply is also affected by the price of the commodity. When the price of the commodity is high, the sellers will be willing to bring more to the market to maximise on revenue receipts and vice versa. Other factors include changes in the cost of production, expansion of the production capacity or entrance of other producers into the market, changes in the supply of other related goods, seasonal and climatic changes, technological changes, and government policies like taxation and subsidies.
Similar to all other market in any economy, the law of demand and supply applies in the housing market. The market for houses involves buyers who are willing to pay for houses at a given price and sellers who are the investors and developers who are willing and able to supply houses to the buyers for a given price. The market forces of demand and supply come into play in the housing industry where the buyers will offer a price for a house and the seller may accept the offer or reject. Where supply meets demand, we will have an equilibrium price and quantity of houses. When the demand for houses equals the supply, we say the housing market is in equilibrium and the market will clear. At equilibrium, all the houses that are supplied to the market will be bought and there will be no shortage or surplus of houses (Farmer, 2007).
The demand for housing is affected by the price of houses and their affordability. When the general prices of houses are high, it may not be affordable to some households. Such household may opt to live as communities. This reduces the quantity of houses demanded. Affordability of a house relates the income of a household to how much the household is willing to spend on residential housing. Housing affordability is different from affordable housing in that affordable housing refers to low-income houses or community housing, while affordability is a concept that relates income and expenditure of households. The income of households can increase due to higher productivity or due to increase in the prices of exports. When the households have a higher income and are willing to spend more on houses then the houses become more affordable and the demand will increase.
Population growth will lead to increase in demands. The population growth in our country is high and therefore there is a high demand for houses especially in the young people who are looking for jobs. Population is increasing due to immigration by workers looking for job opportunities. However, population can reduce due to people marrying later or bearing fewer children, divorce and separation. Such factors could lead to the demand of houses reducing (Gruis & Nieboer, 2010).
When households have easy access to credit facilities, their demand for houses could increase. Ease of access of credit facilities such as loans may be made possible by reducing interest rates or financial deregulation. This makes acquiring loans from banks and non-bank financial institutions easy for households. In addition, the households can afford to pay back their loans. Financing for the purpose of home acquisition will increase the demand for houses including the trend that is now popular for households purchasing homes for speculative purposes (Gruis & Nieboer, 2010).
The demand for housing is relatively inelastic. Price elasticity of demand is the responsiveness of price to changes in demand. When the price increases, the demand will not fall by a big percentage. This is because housing is essential and a tenant will not vacate a house simply because rent has increased.
Similar to demand, the supply of houses is affected by their price. When the prices are good, developers will be willing to build more house units so that they can maximise on revenue. Price of houses is determined by demand. When the demand is high, houses will fetch a good price in the market, the profits will be high, and the developers will supply more houses to the market. Contrary to this, low prices in the market could lead to restrictions in construction of buildings hence a further reduction from the initial brought by low prices. Other factors affecting supply include the attitude of the locals in the area concerning the construction of new homes, and the regulation on the use of land. Government policy include subsidy of construction for low-income houses and the capping of rent by the rent tribunal. This helps to shift the demand curve to the right and ensure that there is no shortage of housing facilities.
The demand and supply of houses works like that of any other market in the economy, where the forces will determine the equilibrium price. At this price, both the buyer and seller are satisfied and there is market clearance. The price of houses is the underlining factor that will determine both demand and supply. Other factors is the availability of credit to both the tenants and the developers that will determine the demand and supply.
The government works to ensure that there are no inefficiencies in the housing market. It regulates the rent and provides subsidy for low-cost housing to ensure both affordability and surplus. Regulation is meant to protect the tenants from exploitation by property owners.
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