Supply and demand dictate the moves the buyers and sellers make in the real estate market. Factors ranging from construction costs to immigration and the state of the economy all affect these dynamics.
Market dynamics also play an essential role. The first step is to have a good understanding of supply and demand in real estate.
Basics of Supply and Demand in Real Estate
Understanding supply and demand in the real estate market means having some simple definitions of the words. Supply refers to the whole amount of any good or service available. The demand is the word used to describe the quantity or amount people are willing to buy at different prices.
Applying those definitions to real estate goes this way: When the demand for houses and properties exceeds the supply, prices rise. On the other hand, when supply exceeds demand, prices tend to drop.
That’s the simple version. Of course, there’s a lot more to real estate than that, including the different factors that affect these categories.
Factors Affecting Housing Supply and Demand
There are many different factors that can influence housing supply and demand. However, most analysts agree that the following are the most influential ones.
Construction Costs
This factor affects the supply side of the equation. Developers can shy away from new projects when they cannot make as much money because the costs of labour, land, and materials eat into profits. Developers can also pass these costs along, which affects the price of new homes. When potential home buyers sit on the sidelines waiting for the prices to fall, the supply eventually shrinks.
Economics
Higher interest rates affect potential home buyers’ costs. Developers can shy away from new housing projects because the cost of borrowing goes up with these rates. However, the higher the interest rates, the less demand from potential homeowners.
When an economy is doing well, there are higher incomes, which can incentivize developers to build more houses and consumers to pay more. The higher the income, the more purchasing power there is, and that means the demand for brand new homes rises.
Inflation can increase the costs of building a house, including labour and materials. When this indicator goes up, the supply goes down. Inflation can also make homes less affordable for the average consumer, and that, in turn, reduces the demand.
Demographics and Immigration
Ontario’s demographics forecast different needs that affect supply and demand. For example, younger people look for starter homes or rental properties. Many senior citizens are looking to downsize or live in retirement or adult-style communities.
Living arrangements also play a role. Single people are looking to live by themselves, and several generations of one family can live under another roof. A recent government report states that the housing gap will be 1,266,000 units by 2030. This report also predicts that, with lower population growth, the housing gap in 2030 will decrease by 0.7 million units.
Finally, higher income levels result in people who are more able to buy homes.
The Regulations
Homes get built on vacant property, so zoning laws that determine how land can be used are critical for supply and demand. Zoning bylaws vary from community to community. However, they state how any land can be used and where structures in buildings can be located.
They affect the supply and demand in any area by detailing the dimensions and lot sizes and other important information like parking requirements, building heights and density.
Building codes and standards can have the same effect. The stricter they are, the more construction costs will increase, which can affect the supply.
Of course, one of the biggest influences is the market itself.
How Market Dynamics Influence Prices
Market dynamics are the pricing signals that influence supply and demand. When it comes to real estate, one theory is called supply-side economics. That theory states that the supply of services and goods, in this case, structures and land, is the most important factor determining economic growth.
Demand-side economics states that economic growth is a result of high demand for goods and services. When the economy is doing well, more people are employed and have more income, which can boost the demand for real estate and drive prices up.
On the other hand, an economic downturn reduces the demand for properties and housing because income has fallen, which in turn leads to lower prices.
Strategies for Navigating Supply and Demand Challenges
If you’re an investor, you can stay reasonably safe from supply and demand challenges by diversifying. Spreading out risk can mean investing in different regions in Ontario. Diversification can also mean having different types of properties in any portfolio, such as industrial, commercial, and residential real estate.
If you’re looking for a home, you should consider the supply of housing in the area you’re interested in. Research any new construction projects, inventory levels, and even housing starts.
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