To start with I will go briefly on what is the law of supply and
demand. As we all have learnt from the course, it
is one of the most basic principles in economics. To be clearer, the law of supply and demand
conditions that when an item is rare, but many people need it, the price of
that item will increase. On the contrary, if there is a larger supply of an
item than consumer request, the price will drop. To narrow down the topic of
this essay I decided to speak about the relationship of supply and demand in
the housing market and how it affects the price of any property.

Typically,
each housing deal involves a buyer and a seller. The buyer places a proposition
for a property and the seller may take it or leave it. The law of supply and
demand dictates the equilibrium price of a property. As it was mentioned at the
beginning of the essay, when the demand is high, it is more likely that the
housing prices will increase and vice versa: when the supply is high then the
price will decrease. However, don’t be easily fooled that this works every
single time. You could have a large supply of housing and if it’s also in high
demand, prices might also increase. For example, there is always high demand
for properties in the capital of Lithuania, Vilnius, however, sometimes there
is a lack of certain quality properties, so it is more likely that the prices
in this market segment will rise. The other example would be related to the
situation which occurred in 2008 due to a weak economy in the country and
oversupply of properties were available, the prices of the houses dropped down
significantly.

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To
continue more with the theory from the class, you may recall that the
supply curve slopes upward for housing, so that when the price is higher, more
owners are willing to sell. The demand curve is going down as increased prices
in housing market leads that less individuals are interested in spending the
money and getting real estate. The two curves – demand and supply – cross at
what’s called as the equilibrium point. At the end we must keep in mind that
there are numerous factors that has impact on the supply and the demand, and at
the end of the day has different effects on housing prices.

Firstly,
when it comes to getting a house or any other property, it is more likely that
we won’t have sufficient funds to cover all the sum. This is when we go to the
banks or any other financial institution to take a loan. Nothing comes for free
in this world, so you will have to be charged by the lender for the use of its
money and this is called interest rate. If there are changes in interest
rate it is more likely that it will affect demand curve more than the supply
curve. As it was mentioned above, it is more likely that you will need to
borrow from the bank which means that you will ask for mortgage to buy home and
when the interest rates drop and are relatively low, it is more likely that in
will influence individuals to purchase. This causes an upward move in the
demand curve, and at every price point there will be more people interested in
buying. This leads to higher prices generally in the marketplace, until we reach
a new equilibrium point.

Secondly, some policies affect
demand. For example, if you are an owner of the
real estate located in Lithuania, you are subject to real estate tax, and the
applicable rate ranges from 0.3 % to 3 %. As I have found online, for
individuals, real estate tax is imposed at a flat rate of 1 %, however taxpayers
may ask to apply a value obtained by their own valuation. This means that if
such value differs by more than 20 % from the average market value or the replacement
value, the municipalities are entitled to reduce the tax or to grant
exemptions. If the government decides to increase real estate act, so the
deduction from your taxable income will increase which will lead to decreased
demand for housing. Other
procedures and rules affect the supply, such as reduced tax rates on capital
gains. This might lead to the situation, when more owners are willing to sell,
because they’ll pay less tax on profits they have on the house. We know that currently
five years period applies when it comes for those who want to sell the real
estate if they don’t want to pay 15 % tax rate on capital gains. If the government
applies or introduces any changes and reduces tax rates or time gap, it is more
likely that the supply curve moves out, pushing more available estate onto the
market, and unless demand changes, prices will more likely to drop.

Thirdly, this factor is harder to
measure, and I would call it intangible. The location is a major factor when it
comes to the price of the property and literally you can’t change it. Let’s say
you are a young family, so you will be looking for neighborhoods with good
schools or kindergartens, that means that housing demand in such areas is higher
and this is affecting the prices to rise. Emigration is a huge problem in Lithuania,
so any demographic changes also might lead to lower demand in the market. The
is another side of this huge problem of our country, when people are moving
away and planning to leave the country for good, this leads to an increase in
supply and lower prices.

Furthermore, I want to look more
into detail at the demand curve and how it is affected by many factors,
including price. Price and demand is a great example of inverse relationship: a type of correlation that exists between two different numbers. In
this case, according to the business dictionary, when one number has a value
that rises, then the other will correspondingly fall in the value of the first
number. As with all products, the inverse relationship can be explicated
with reference to the income and substitution effect. So, this is how it works: if the price
increase, the alternatives or substitutions as they are called appear more appealing
and people are more likely to rent instead of buying a property. And vice
versa, when the prices of property are lower then individuals are more likely
to buy a property. However, the demand for real estate is also partly hypothetical,
so that an increase in prices can lead to an increase in demand as costumers
anticipate a speculative gain.

I will continue to talk about
noon-price determinants which can influence demand curve to move. These non-price
factors pay significant role the same as price and may shift the curve to one
side or another. For example, the incomes of households. As houses are normal
goods with a high-income elasticity of demand, growths in income can cause a
larger percentage growth in demand. If someone is getting a promotion and the
income will increase, so it is more likely that the person might start looking
for owning a property instead of renting. Some of people might even think of
getting second home and renting it out – options are endless. So, if the income
of the household rises, the demand curve will shift to the right.

We also do need to keep in mind
the social trends which influence demand curve. As we tend to get married later,
this is leading to the growth of demand for single households which meant that
buyers are more likely to look for flats or apartments. Nevertheless, the availability
of credit also pays a huge role in the market of housing. Again, look back at
the crisis period in Lithuania almost ten years ago. What happened? The supply
of credit fell which reduced the demand for housing and this influenced the
prices: they dropped. As stupid as it sounds but we also to keep fashion into
the consideration. Lithuania is the country where people are more likely to buy
a property than rent and this is indirect consequence of TV. We do all know how
television is forming our perception, so increased number of programs featuring
renovations and “make overs” had increased the interest in housing and its
market.

Let’s got back to the supply
which partly influenced by price, together with many basic determinants. The price
increase encourages construction companies to build more housing, and current
owners are stimulated to sell. The supply of real estate is completely related
to price and the supply curve is upward sloping. However, supply is often
inelastic because of time lags and legal complications and, in the case of
new-builds, as it is sometimes difficult to obtain planning permission. And again,
there are numerous of non-price factors which cause a shift in the supply curve.

We shall continue with the
availability factors which include land. If you want to build a new building, you
will need an available piece of land and it is becoming limited in short run.
An increase in the availability of land will move the supply curve to the
right. Another important factor is an availability of labor. For example,
currently there is a lack of people working in construction industry and this
is causing a problem in Lithuania. We are trying to invite workers from other
countries, however, in long run if it will become a problem to find someone who
works, we might see a reduction of supply of new houses. We also must keep in
mind the cost of materials and labor. A lack of labor, for example, could push
up the salary rate and rise building costs, which would cause the supply curve
to shift to the left. Time is ticking, and we are always going step by step
with technology. The new building methods are applied, such as
‘pre-fabrication’, and the use of new building materials have improved the time
at which new houses are built, and later increase the supply of property. This
has tended to increase the elasticity of supply of properties at the cheaper
end of the market.

To
summarize this essay, I would like to point out that price is not only factor which
influence the demand and supply in the housing market. There are a lot of
additional factors which sometimes you might not think of or even relate its relativeness
to lead the curves to shift one or another way.