DEMAND AND SUPPLY OF REAL

ESTATE
By Nino Josph Mihilli

LAW OF DEMAND
Thelawofdemandstatesthatthequantitydemandedandthepriceofacommodityare

inverselyrelated,otherthingsremainingconstant.Itstatesthatdemanddecreaseswith
increaseinpriceandviceversa.
Ineconomics,thelawstatesthat,allelsebeingequal,asthepriceofproductincreases,
quantitydemandedfalls;likewise,asthepriceofaproductdecreases,quantitydemanded
increases
Therearevariousotherfactorsthataffectthedemandforrealestate
Basedonthesefactorswecanderivetheequationforrealestate
D = f {D, I, P, Cb, Cr, T, Ti, Ps}

D-demandforrealestate

Iincomeofcustomers

Ppriceofhousing

Cbcostofborrowing

Cravailabilityofcredit

Tconsumerspreference

Tiinvestorsprefernece
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Ps-priceofsubstitutesandcompliments

DEMAND CURVE

demandcurve,showninredandshiftingtotheright,demonstratingtheinverse
relationshipbetweenpriceandquantitydemanded(thecurveslopes
downwardsfromlefttoright;higherpricesreducethequantitydemanded).

LAW OF SUPPLY
Lawofsupplystatesthat,allotherfactorsbeingequal,asthepriceofagoodor

serviceincreases,thequantityofgoodsorservicesthatsuppliersofferwillincrease,and
viceversa
Thelawofsupplysaysthatasthepriceofanitemgoesup,supplierswillattemptto
maximizetheirprofitsbyincreasingthequantityofferedforsale
However,inexaminingtheforcesdeterminingthesupplycurve,weneedto
analyzethefactorsuponwhichthesupplyofagooddepends
Factorsdeterminingthesupplyofrealestatecanbestatedintheformofasupply
function
S = f {P, A, B, Cr, L}

S-supplyofrealestateproperty

P-priceofproperty

Availabilityofland

Efficientbuilders

Cr-easyaccessibilityofcredit

L-skilledlabours
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SUPPLY CURVE

Thechartabovedepictsthelawofsupplyusingasupplycurve,whichisalways

upwardsloping.A,BandCarepointsonthesupplycurve.Eachpointonthe
curvereflectsadirectcorrelationbetweenquantitysupplied(Q)andprice(P).So,
atpointA,thequantitysuppliedwillbeQ1andthepricewillbewillbeP1,andso
on.
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INTRODUCTION TO THE REAL

ESATE INDUSTRY
Itcomprisesoffoursub-sectors
Housing
Retail
Hospitality
Commercial
Therealindustrysgrowthislinkedtodevelopmentsinthe
Hospitality
Entertainment ( hotel, resorts, cinema theatres) industries,
Economic services ( hospitals, schools)
Information technology (IT) enabled services ( like call centres) etc

WHAT PROMPTS A PERSON TO TRY

HIS FORTUNE IN THE FIELD OF
REAL ESTATE SECTOR?
Thefirstandforemostisthattherealestatebusinessisriskless
Second,theevergrowinghousingneedsfilledbylowinterest
Lastbutnottheleastisinvestinginthesector`whereeverywhereelsedoescanalso

becitedasoneoftheimportantfactorsleadingtoheavyinvestmentinthissector

WHAT ARE THESE

FACTORS WHICH DRIVE
REAL ESTATE PRICES ?
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MAJOR DEMAND FACTORS THAT

AFFECTS THE PRICE
LOCATION
AMENITIES
INFRASTRUCTURE
COMMERCIAL REAL ESTATE
DISPOSABLE INCOME
AVAILABILITY OF LAND
AFFORDABILITY
STRUCTURE
CUSTOMIZATION
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LOCATION

Buildings,realestateandproperties,locatedincommercialandmarketareas,holdhigher
valuethantheircounterpartsintheresidentialareas
Itiscommontofindbrokersquotingahigherpriceforbuildingsinwelldevelopedand
approvedcoloniesandareasasagainstthoseinthelesserdevelopedandupcomingareas
Similarlybuildingswhichareconstructedonfreeholdlandtendtocommandahigher
valuationthanthoseonleaseholdplots

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AMENITIES
Thevaluationofpropertieswithbetterinfrastructuralcapabilitiesandmodern

amenitiesarecostlierthanthosewhichfailtoprovideproper
Electric connections
Telephone lines
Water sewerage facilities

Other infrastructures
Community centres
Children parks
Swimming pools
gymnasiums
Parking lots
General stores
Valuationofpropertyisclearlybasedontheavailabilityofnecessitiesand

facilitiesconnectedwithcomfortablehousing
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INFRASTRUCTURE
Infrastructuraldevelopmentisoneofthemostimportantfactorswhichinfluence

realestatepricesinUSA
The presence of roads, airports, flyovers, malls and bus terminals andother

facilitiesinthevicinityoftheproperty,helpsinvalueescalationofthesame
Itisaknownfactthatconnectivityisoneofthemostimportantrequirementsfor

investorslookingtowardspurchasinglandorproperty
Thisleadstotheconceptwhichexplainsariseinthevaluationofpropertywhichis

wellconnectedto
Entertainment hubs
Medical facilities
Educational institutions
Retail markets
Business centres
Along with other day to day facilities

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DISPOSABLE INCOME AND

AVAILABILITY OF LAND

DISPOSBALE INCOME
Propertieswhicharelocatedinagriculturalareasorthosedominatedby

manufacturingunitsattractalowerpricethanthosesituatedneartheIThubs
Thevaluationofpropertyisindirectproportiontothequantumofdisposable

incomeinthehandsofthepurchaserorthemajorityofpopulationinthatarea
AVAILABILITY OF LAND
Inplaceswherethereisamplelandavailableforresidentialpurposesor
developmentofrealestate,thegraphreflectingthevaluationofpropertyshows
aslowerrisethaninareaswherelandiscomparativelyscarce.

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AFFORDABILITY

Affordabilityreferstothecostincurredbytheownerintheprocessofenjoying

orretainingaproperty
Inlayman'sterm,itisthetermwhichestablishesarelationshipbetween

interestrates,propertypricesandwages
Ifanyofabovethreevariablesreachtheirmaximumlevelinaparticulararea,

thentheinhabitantsstartlookingtowardsabetterlifestyleelsewhere

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STRUCTURE
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 PROPERTY ARE

The quality and cost of materials during construction

Size

Current rates of labour

Frontage
OTHER PHYSICAL ATTRIBUTES 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
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CUSTOMIZATION
Thecostofrealestatebecomeshigherintheeventofbuildersundertaking

customizationofresidentialspaceonthelinesofthepurchaser'srequirements
Forexample,someinvestorsmaywantlandscapedterracesorverandas

connectedwiththeirapartments,upgradedkitchens,specificallydesigned
internalstairwaysinduplexapartments,higherqualitypaintandflooring,or
otheruserdefinedchanges
Thisleadstoanescalationintheultimatepricechargedtothebuyer
Beforemakingtheirrealestatepurchasedecisions,investorsshouldconduct

ananalysisofthesedriverstogetafairvaluationofthepropertythatinterests
them
Carefulinvestigationandhomeworkcanleadtobetterreturns,easyliquidity

andmorelucrativeinvestments

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SUPPLY FACTORS AFFECTING THE

REAL ESTATE INDUSTRY
Ifthereisalimitedsupplyofrealestateinthemarket,itwillusuallypushthe

priceshigher
Conversely,iftherearealotofpropertiesinthemarket,thetendencyisforthe

pricetogodown
Abalancedmarketwillworkwellforbothsellersandbuyers
Evenifthesupplyisimbalanced,thereareotherfactorsthatcanmakethereal

estatemarketperformingwell
Buildersforexamplearegoingtoadjusttheirplanstoavoidoversupplyofnew

homesintheirarea
Themoretheybuild,thelowerthepriceswouldbesotheyarenotgoingtobuild

andbuildwithoutregardforthesupplyfactor
Anotherthingthatcanbalancetheoversupplyofhousingistheavailabilityofland
Someregionsdonothaveplentyofspacefornewhousingsotheriskof

oversupplyofpropertiesinthemarketisnotthathigh

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DEMAND VERSUS SUPPLY

Thehigherthedemandforrealestate,the

higherthepriceswouldbe
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
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IMPACT OF RECESSION ON REAL

ESTATE
Incompletionofpreviousprojects
Baddebts
Lessdemandinallsegments
Cashstarvation

Incompleti
on of
previous
projects.

Bad
Debts.

Less
demand in
all
segments.

Cash
starvation.

BARRIERS IN GROWTH OF REAL

ESTATE
SkillShortage.
NonAvailabilityofStatistics.
OvervaluationofProperty.
HighlyFragmented.
LackofTransparency.

EXPECTATIONS OF CUSTOMERS

Budgetofthecustomer

Loanamountsanctionedtothecustomers

Incomereturnsfromtheproperties

Localityoftheproperty

Properdrainagesystemfacilities

Locationofschools,hospitals,markets,busstopsfromtheproperty

Privacyofliving

Qualityofbuilding

Availabilityofspaceforcarparking

Locationofthefloorofthehouse

Vastuofthebuilding

Pattaandotherapprovalforbuildings

Safety

Approachtobuilding

Approachabilityofbrokers

Giftsforthepurchasesofhouse

DownpaymentsandEMI

Locationoftherecreationandnearbyreligiousplaces

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CONSTRAINTS OF BUILDERS

Accidentsthatrecentlyhappenedinthatparticularlocality
Excessbudget
Lackofventilationinthebuilding
Newgovernmentpolicies
Inflation
Locationoftherecreationandreligiouscentrenearby
FluctuationsinGDPofthecountry
Incomeofthepeople
Demographicdividend
Ambienceoftheproperty
Saturationofgrowthoftheproperty
RescissionintheITandmanufacturingsector
Changingcustomerpreferences
Levelofwatertableinthatlocality
Locationofschoolsandcolleges,officenearby
Expensessentonapproval
Expensesonfreegiftsandmarketing

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CONCLUSION
REAL ESTATE PARCELS ARE UNIQUE AND FINITE
Youcannotfillarealestatesupplyshortagebymanufacturingmoreidentical

units
Eachpieceisdifferentandthereisafinitesupply
It'snotamanufacturedcommodity
Thoughyoumightbeabletocreatemorecondosinagivespace,thespace

itselfisuniqueandcannotgrowtoaccomodateashortsupply
REAL ESTATE CANNOT BE MOVED TO FILL SHORTAGES
Ifthereisashortageoflandforhomesinagivenarea,youcannotmovein

morelandtoalleviatetheshortage
Realestateiswhereitsits.Forthisreason,itwillalwaysbealocalcommodity

influencedbylocalconditions

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Conclusioncontd...
OVER-SUPPLY MEANS LOWER PRICES:
Becauseofthefirsttwoitemsabove,youcanusuallyexpecttheretobea

fallinpriceswhenthereisanover-supplyofhomesorlandinagivenarea
Youcannotmovetheoveragetoanotherareatokeeppricesstable

UNDER-SUPPLY MEANS HIGHER PRICES:

Ifthereisn'tenoughlandorhomesinagivenarea,thenpriceswillalmost

alwaysrise
Evenifthereistheabilitytoconstructmorehomes,thetimedelaycannot

fillthedemandandpriceswillrise
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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