1. ECONOMY FOR REAL ESTATE (BPE 33902)
Prepared By:-
Sr Norjariah binti Arif,
Department of Real Estate Management,
FPTP, UTHM.
2 December 2013

2. LECTURE 9
THE OPERATION OF THE HOUSING MARKET

3. Learning objectives After reading this topic you will be able to:-
Explain the heterogeneity of the housing market
Distinguish between housing supply, new housing and the housing stock
Outline the problems caused by speculative house buyers, and the implications of the problems on supply

4. Cont…
Explain how prices are influenced by short term demand factors, which in turn, are determined by the macro economy
Define the concept of filtering, distinguishing it from trading up

5. The Housing Market
The house purchase market is a market like any other: customers view, weigh up and consider the options, and finally buy from a seller.
Most significant aspect of the housing market is the unique nature of the housing ‘product’.

6. Cont… As a product, housing is marked out as: - heterogeneity
The product is widely varied. Identical houses in different locations are not necessarily close substitute: diff in their convenience for shopping, work, schools, transport and leisure will be affected some way or other

7. Cont…
Even within the same area, houses may not be close substitute. For eg, a 4 bedroom detached house in its grounds may be within a few hundred metres of a two bedroom flat, but the two would not be a close substitutes. Houses in close proximity may also differ in terms of the amenities provided and the improvements made by occupants

8. Cont….
Complexity
A house is a complex product. It is not like a simple implement or piece of furniture which has a single function or purpose.
House buyers are purchasing a flow of services which includes:

9. cont A flow of services - shelter - warmth - security - privacy
- space
- comfort
- closeness to amenities

10. Cont…
Heterogeneity and Complexity: implications on the operation of the housing market:
1. Information about the housing market, including availability, rents and prices is not readily available. Households enter the housing market rarely – at most every few years. Housing market diff each time a household is involved in it

11. Cont…
2. There is no fixed market place for the renting and buying. Properties can be advertised and sold or let privately, or through agents or other clearing bodies which may be organised. Researching the housing market and viewing properties available can be time consuming and stressful

12. Cont….
3. The housing market is limited by various institutional and legal constraints which prevent its functioning more like an idealised. perfect market. The actual purchase of a house and disposal of a former dwelling must be carried out according to strict legal forms – time consuming and expensive

13. Housing Terms
Housing Stock- the total existing quantity of completed dwellings. The housing stock is a relatively stable measure. At any time, there is only a small proportion of additions and removals from the housing stock.

14. Cont…
Housing Supply- The supply of housing is comprised of those dwellings available for sale or rent: some of those dwellings will be new, but the vast majority will be from the housing stock.

15. Cont…
New Housing- New houses that are offered for sale or rent are part of the supply of housing. They are also added to the overall housing stock. New houses compete in the same market as the existing stock, but usually represent a small proportion of the supply.

16. Speculative Housebuilding
Most house builders who build for sale operate in a speculative way. The housebuilder will respond to changes in demand for housing. If there is a rising demand, housebuilders will be motivated to add new supply. However there is problem: in reality there can be a two year delay or lag between the decision to build and its completion.

17. Cont..
Reasons :
Before building can commence, a suitable site may have to be found and acquired. Subject to planning constraints.
2. House construction has not had its methods revolutionised by new technology. Dependent on qualified trades such as joinery, bricklaying and plumbing

18. Cont..
3. the factors of production in house construction are not easily substitutable. If land or skilled labour is unavailable, the production process must slow down or cease. The supply of housing can respond very slowly to changes in demand. In other words supply is inelastic.

19. Cont…
When there is rising demand for housing, prices will rise as the industry respond with increased supply. However, with a time lag, a great deal can happen between the decision to build and completion. Demand may fall significantly over the period- unable to sell, or have to sell at an uneconomic price.

20. House Price and Short-term Demand Factors
Price determined by the interaction of supply and demand. The mechanism:
- demand increase as price falls
- supply increase as the price rises
- the point of intersect represents the optimum or equilibrium

21. Cont…
Some aspects of house purchase market distinguish it from others, in particular housing supply is relatively unresponsive: it changes by a small amount after a time lag when there are changes in price. The supply of housing varies in size only marginally relative th the total stock. The ssis made up of new buildings and disposals as a result of moving. Therefore demand is the key factor in determining house price.

22. Short- term dd influences on house prices
Growth in real income. When incomes and standard of living are rising, first time house buyers increase
The cost of buying such as mortgage payment, maintenance and property taxes. If cost fall, demand is likely to rise.
Availability of finance have an effect on demand

23. Cont…
These factors depend to a greater or lesser extend on changes in the macro economy. For eg, mortgage rates change in response to the general economic situation; rising real income also reflect general improvement in the economy.

24. Filtering and Trading Up
Filtering models centre on the changes in occupancy, quality and price of housing and tend to have the follow characteristics:
- the existence of a number of housing sub markets is assumed
- the link between new and second hand markets is focused on
- the movement of households relative to existing housing stocks is studied

25. Cont… Filtering models are aslo known as succession model
Homer Hoyt. – in the context of urban growth. The wealthiest, most influential economic group occupy an area adjacent to the centre. Those within lower income group tend to live near to their peers, so sub-market appear.

26. Cont…
In time the city boundaries spread as the dominant group tends to move out into sub urban locations. The area they vacate will become available to the income group, and there will be a process of succession.

27. Trading up
A process related to filtering is trading up. It concerned with the movement of households and describes how, over time, each households tries to move to successively more desirable accomodation.

28. Cont…
Household movement is explained by the successive stages of the family life-cycle. Households trade up in order to obtain increased quality of housing as their needs change. Each move to more expensive housing frees cheaper accomodation for first time buyers or others at earlier stages of the family life cycle.

29. THANK YOU