Determinants of House Prices

Determinants of House Prices

            House price dynamics are usually modeled in terms of changes in housing demand and supply. On the demand side, key factors are typically taken to be expected change in house prices, household income, the real rate on housing loans, financial wealth, demographic and labor market factors, the expected rate of return on housing and other demand shifters. On the supply side, factors include proxies of the location, age and state of housing or institutional factors that facilitates or hinder households’ access to the housing market, such as financial innovation on the mortgage and housing loan market.

 

Discussed below are some of the factors that affect house prices.

1. Growth of Bank Credit – One of the factors that affect house prices is the growth of bank credit to households.

2. Demographic Factors – Demographic factors play a role in housing demand and house prices. If there was a baby boom in the 1970s and the early 1980s demand will rise as these cohorts approach their prime earning age and enter the housing market.

3. Regulatory and Institutional Framework – Improvements in the regulatory and institutional framework necessary for the development of the property market have largely occurred as a result of the EU accession process. In particular, reforms in legislation and judiciary practices that make it easier for creditors to seize real estate collateral removed a key obstacle to buying and selling property.

 

 

Demand can be defined as the quantity of a commodity consumers are willing to purchase at a particular price. The demand for most commodities will rise as their price falls and fall as their price rises and there is therefore an inverse relationship between price and quantity demanded. This can be understood more clearly when we realize that the market demand for a commodity is itself made up entirely of the individual demands of consumers or producers. Individual consumers will have a choice of alternative products in any single category (for example, different makes of cars), and they will also be constrained by fixed levels of income. If the market price of a commodity rises, consumers will have to either reduce their consumption of the good or find a suitable alternative or they will have to reduce their consumption of another good. A similar pattern will emerge for commodities which are demanded mainly by producers. For example, if there is a rise in the price of bricks, producers (e.g. construction firms) will try to substitute other materials such as timber, cement or steel (the prices of which we assume have not risen) for bricks in the production process (in this case construction).

 

1. Purchasing power of the household which is mainly dependent on the level of income. With a rise in income, households can potentially purchase greater quantities of all of the goods they currently consume. In practice, however, demand for some commodities will rise faster than others as incomes increase.

2. A change in tastes may influence consumption patterns. For example, a trend towards ‘green’ awareness may encourage households to consume more energy-efficient items—demand for roof insulation, double glazing, low-energy lighting, etc. may subsequently rise.

3. The prices of other goods. Some goods may have close substitutes, for example tea and coffee, so that if there is a sudden rise in the price of either, consumers are able to switch and consume more of the (now relatively cheaper) alternative.

 

Supply Curve

1. If there is a change in the state of technology which lowers the cost of production. For example, it was hoped that the introduction of industrialized building techniques in the 1960s would greatly reduce the cost of local authority house-building.

2. If there is an upwards or downwards shift in the price of factors of production. For example, a rise in the price of oil would raise the cost of producing plastics used in windows and many building materials. It would also increase transport costs, thus affecting most industries in the economy in some way.

3. If there is a change in the objectives or goals of producing firms. Normally, we assume firms have the same goals and aim to maximize profits. However, there may be other objectives which can override profit maximization; for instance, firms may accept lower prices to achieve higher market share, or they may accept higher costs to ensure security of supply of certain factors of production (e.g. raw materials). Other firms may accept lower prices or higher costs in order to achieve social or environmental objectives.

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