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Demand for Housing depends on various 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.

This graph shows that house prices (and therefore demand for housing can rise much faster than earnings, suggesting there are many other factors influencing demand – at least in the short run.

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 graph above.

3. Interest Rates.

Interest rates play a big factor in determining the cost of mortgage interest repayments.

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.

Population.

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.

Effective Demand.

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.

Factors Affecting Supply

• Number of new houses being built.
• Planning restrictions on the use of land.
• Profitability of building new houses. This is dependent on 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.

Related

• Factors affecting house prices