Factors Affecting Demand for Housing

Readers Question What are the factors that influence the demand of housing in general.

Some of the most important factors are:

  • Affordability. Ratio of house prices to incomes. If affordability improves demand should rise, but, it depends on many other factors. e.g. at moment housing affordability is improving because prices are falling but people don’t want to or can’t buy.

For example in the mid 1990s, mortgage payments as a % of take home pay, fell to less than 20%

housing

  • Availability of mortgages. Most people are dependent on getting a large mortgage upto 95% of house value. If mortgages become less available then demand will fall. E.g. since credit crunch availability of cheap 95% mortgages has declined. Banks are demanding bigger deposits that many first time buyers don’t have therefore demand for housing has fallen.
  • Price expectations / confidence. People don’t like to buy when house prices are falling because they will be able to buy it later for cheaper.
  • Interest rates. Interest rates determine the cost of paying a variable mortgage. Lower rates make interest payments more affordable.
  • Cost of renting. The main alternative to buying a house is renting. If the cost of renting to buying rises, we would expect to see a fall in demand.
  • Economic growth / unemployment. Higher economic growth and falling unemployment will lead to rising demand.
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