Answer to Question #199563 in Macroeconomics for nisa

Question

Based on the above article, is the expected increase in residential property prices caused by demand or supply factors? Explain and illustrate your answer.

Answer 1

According to the question above there is no article provided, so my answer will base on the factors that cause an increment on residential property price.

 Fiscal inflation

Inflation is produced by an excess of money in circulation, resulting in a decrease in the value of money. As a result, prices for a variety of inputs such as land, construction supplies, construction labor, and statutory building licenses all rise. Of course, inflation will not result in higher property prices in a place if the place is lacking ,that is, if it has adequate accessibility, social and civic facilities, or if it has already witnessed an abundance of residential buildings.

Cost of borrowing (interest rates on home loans)

The change of house loan interest rates, whether upward or downward, is directly related to real estate appreciation. When borrowing costs rise, demand for properties declines because fewer purchasers can afford the increased price. Similarly, when house loan interest rates drop significantly, affordability improves and market mood improves, resulting in increased demand for residential real estate.

Demand and supply

When there is a growing demand for homes in a particular location, property prices rise if the number of residential real estate projects being created to accommodate the need does not keep pace. In other words, end-users (those who buy homes for their own use) are ready to spend extra for a property because the region is attractive and desired.

End-user demand also attracts the attention of real estate speculators, who buy residential properties with the intention of reselling them when supply in the area decreases and prices rise even higher. The best time for end-user purchasers to purchase a house in a location with strong appreciation potential is when investment activity has not yet started.