About Demand and supply of real estate By Nino joseph Mihilli

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Information about About Demand and supply of real estate By Nino joseph Mihilli

Published on January 2, 2017

Author: NinoJosephMihilli12

Source: slideshare.net

1. 1 DEMAND AND SUPPLY OF REAL ESTATE By Nino Josph Mihilli

2. LAW OF DEMAND 2  The law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. It states that demand decreases with increase in price and vice versa.  In economics, the law states 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 estate  Based 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 estate  I – income of customers  P – price of housing  Cb – cost of borrowing  Cr – availability of credit  T – consumer’s preference  Ti – investor’s prefernece  Ps - price of substitutes and compliments

3. DEMAND CURVE 3 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).

4. LAW OF SUPPLY 4  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 versa  The 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 property  P- price of property  Availability of land  Efficient builders  Cr- easy accessibility of credit  L- skilled labours

5. SUPPLY CURVE 5  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.

6. INTRODUCTION TO THE REAL ESATE INDUSTRY 6  It comprises of four sub- sectors  Housing  Retail  Hospitality  Commercial  The real industry’s growth is linked to developments in the • Hospitality • Entertainment ( hotel, resorts, cinema theatre’s) industries, • Economic services ( hospitals, schools) • Information technology (IT) enabled services ( like call centres) etc

7. WHAT PROMPTS A PERSON TO TRY HIS FORTUNE IN THE FIELD OF REAL ESTATE SECTOR? 7  The first and foremost is that the real estate business is riskless  Second, the ever growing housing needs filled by low interest  Last 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

8. WHAT ARE THESE FACTORS WHICH DRIVE REAL ESTATE PRICES ? 8

9. MAJOR DEMAND FACTORS THAT AFFECTS THE PRICE 9  LOCATION  AMENITIES  INFRASTRUCTURE  COMMERCIAL REAL ESTATE  DISPOSABLE INCOME  AVAILABILITY OF LAND  AFFORDABILITY  STRUCTURE  CUSTOMIZATION

10. LOCATION 10  Buildings, real estate and properties, located in commercial and market areas, hold higher value than their counterparts in the residential areas  It 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 areas  Similarly buildings which are constructed on freehold land tend to command a higher valuation than those on leasehold plots

11. AMENITIES 11  The 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 infrastructures  Community centres  Children parks  Swimming pools  gymnasiums  Parking lots  General stores  Valuation of property is clearly based on the availability of necessities and facilities connected with comfortable housing

12. INFRASTRUCTURE 12  Infrastructural 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 same  It is a known fact that connectivity is one of the most important requirements for investors looking towards purchasing land or property  This leads to the concept which explains a rise in the valuation of property which is well connected to  Entertainment hubs  Medical facilities  Educational institutions  Retail markets  Business centres  Along with other day to day facilities

13. DISPOSABLE INCOME AND AVAILABILITY OF LAND 13 DISPOSBALE INCOME  Properties which are located in agricultural areas or those dominated by manufacturing units attract a lower price than those situated near the IT hubs  The 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.

14. AFFORDABILITY 14  Affordability 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 wages  If any of above three variables reach their maximum level in a particular area, then the inhabitants start looking towards a better lifestyle elsewhere

15. 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 PROPERTYARE  The quality and cost of materials during construction  Size  Current rates of labour  Frontage OTHER PHYSICALATTRIBUTES THAT AFFECTS THE PRICE ARE  Roof covering  Height of the building  Type of foundation  Waterproofing  Plinth level also affect the price of a particular property

16. CUSTOMIZATION 16  The 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 changes  This 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

17. SUPPLY FACTORS AFFECTING THE REAL ESTATE INDUSTRY 17  If there is a limited supply of real estate in the market, it will usually push the prices higher  Conversely, if there are a lot of properties in the market, the tendency is for the price to go down  A balanced market will work well for both sellers and buyers  Even if the supply is imbalanced, there are other factors that can make the real estate market performing well  Builders for example are going to adjust their plans to avoid oversupply of new homes in their area  The more they build, the lower the prices would be so they are not going to build and build without regard for the supply factor  Another 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

18. DEMAND VERSUS SUPPLY 18  The higher the demand for real estate, the higher the prices would be  Demand 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 increases  Changes 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

19. IMPACT OF RECESSION ON REAL ESTATE  Incompletion of previous projects  Bad debts  Less demand in all segments  Cash starvation Incompletion of previous projects. Bad Debts. Less demand in all segments. Cash starvation.

20. BARRIERS IN GROWTH OF REAL ESTATE Skill Shortage. Non Availability of Statistics. Overvaluation of Property. Highly Fragmented. Lack of Transparency.

21. EXPECTATIONS OF CUSTOMERS 21  Budget of the customer  Loan amount sanctioned to the customers  Income returns from the properties  Locality of the property  Proper drainage system facilities  Location of schools, hospitals, markets, bus stops from the property  Privacy of living  Quality of building  Availability of space for car parking  Location of the floor of the house  Vastu of the building  Patta and other approval for buildings  Safety  Approach to building  Approachability of brokers  Gifts for the purchases of house  Down payments and EMI  Location of the recreation and nearby religious places

22. CONSTRAINTS OF BUILDERS 22  Accidents that recently happened in that particular locality  Excess budget  Lack of ventilation in the building  New government policies  Inflation  Location of the recreation and religious centre near by  Fluctuations in GDP of the country  Income of the people  Demographic dividend  Ambience of the property  Saturation of growth of the property  Rescission in the IT and manufacturing sector  Changing customer preferences  Level of water table in that locality  Location of schools and colleges, office near by  Expenses sent on approval  Expenses on free gifts and marketing

23. CONCLUSION 23 REAL ESTATE PARCELS ARE UNIQUE AND FINITE  You 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 commodity  Though 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 SHORTAGES  If 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

24. Conclusion contd... 24 OVER-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 stable UNDER-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.

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