Demand-side factors

1. Affordability.

Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends to be a luxury good. So a rise in income causes a bigger % rise in demand.

2.  Confidence

Demand for houses depends on consumer confidence. In particular, it depends on people’s confidence about the future of the economy and housing market. If people expect prices to rise, demand will rise so people can gain from rising wealth. In a boom, demand for houses rises faster than incomes as seen in the graph above.

3.  Interest Rates

Interest rates play a big factor in determining the cost of mortgage interest repayments. The majority of Indian homeowners still prefer to take out variable mortgage rates (unlike the continent where fixed rate mortgage deals are more common). Therefore any change in the base rate by the R.B.I. will immediately affect the mortgage interest payments. This is a major factor in determining the affordability of housing. Mortgage payments take a high % of people’s personal disposable income. When interest rates reached 15% in 1992, demand for housing collapsed, causing a large fall in demand for housing. The relatively low-interest rates of the 90s and 2000s encouraged more to buy a house. However, in 2008-09, interest rates were cut to 0.5%. Even though interest rates were very low, demand also remained low. This was because, other factors were reducing demand for housing – like the recession and prospect of rising unemployment.

4.  Population

  The population in India is growing at a very fast pace A very important factor. It is not just the number of people but demographic changes. e.g. growing number of single people living alone has led to increasing demand for houses. The demand for housing doesn’t just depend on the population but also the average size of a household. Certain social and demographic factors are causing a rise in the number of households (faster than the population increase). These demographic changes include issues such as:

age of people leaving home

Increased life expectancy, leading to more single old people

Divorce rates, – increasing number of single-parent

5.  Mortgage availability

Another factor that determines the effective demand for houses is the willingness of banks to lend mortgages. If banks give mortgages with bigger income multiples, then the effective demand for houses is greater. The willingness of banks to lend mortgage finance can vary depending on the strength of the interbank lending sector.

6.Economic growth and real incomes.

Rising incomes enable people to afford bigger mortgages and encourages demand for housing. In boom times, demand for housing grows rapidly suggesting demand for houses is income-elastic

7.  Cost of renting.

If the cost of renting rises, then households will make greater efforts to try and buy a house as buying a house through mortgage becomes relatively cheaper. The Indian housing market has been buoyed by expensive renting costs, which encourages buy to let lenders and encourages households to stretch their budget as much as possible to get on the housing ladder.

Factors affecting supply 

  • The number of new houses being built.
  • Planning restrictions on the use of land. A big issue in the India is planning restrictions and limitations on building on green-belt land
  • Local opposition to new home There is widespread opposition to building new houses as local communities usually prefer to live in smaller villages without increased congestion.
  • The profitability of building new houses. This is dependent on the demand for houses and prices. In a boom, builders are usually keener to build more. Falling house prices can lead to a restriction in supply.

Aside from the above, there is also something to be said about the effects of RBI policies that foster a shift from more secure and dependable assets such as bonds into less-dependable and riskier assets such as stocks and real estate. Driven by a search for yield and higher returns, investor demand for housing (whether by direct ownership, such as an individual purchasing a home to let) or by a corporate mechanism (such as a Real Estate Investment Trust that purchases a large number of homes to rent) also influences supply, demand and pricing dynamics by keeping a portion of potential for-sale inventory off the market for an indeterminate period of time.

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