Explain The Health of Global Housing Market.
The health of the global housing market around the world is the thriving issue as it is the mere existence of the shelter for the 3 billion populations. The housing market is believed to be the most volatile market with the recent boom and busts in the market, the market is somewhat misbalanced and need an urgent recovery. The ever increasing population along with several other factors augmented the demand for the houses. Out of the 26 markets of housing around the world, 19 markets reveal a rise in the house price at a median pace of 5.2% per year. (the economist, 2015) as large portion of the income of the individuals are engaged in the purchase of the house, the market has gained importance. It has been a concern in the world of the housing market as there is disequilibrium in the market. The disequilibrium in the housing market is due to the shortage of supply of houses which is mainly due to the population growth and the increased demand for houses. In order to assess the disequilibrium in the global housing market, the demand and supply of the housing market with the pressure it created on the price of the houses will be discussed in this paper. (priemus, 2014)
Housing market is the most essential part of any growth in the countries but during the global financial crisis, the housing market has witnessed too major booms. Thus it can be said that the housing market is vulnerable and full of crisis. In this section, the current housing market condition will be presented. The global housing market with all the policy tools that most of the countries have implemented is recovering at a slow pace but till the year 2014, the global housing market was booming for the worst. (the housing market, 2014) the global house prices for the year 2014 had been increasing at an alarmingly rate which can be attributed to the growth in the credits around the world. The availability of credit has become easier these days which have augmented the people to demand and purchase the houses increasingly. It can also be said that with the rise in the house prices the credit growth also increased. In most of the oecd countries the house prices have been increasing rapidly as compared to the income of those countries. Thus, the house price-to-income ratio has increased over the years. There is also a similar relation between the house price and the rent. House prices here also increased more than the increase in the rent giving a hike in the house price-to-rent ratio. Thus, it can be inferred that the house prices were increasing alarmingly which led to the question of disequilibrium in the global housing market. (imf.org, 2015)
The determinants of the demand and supply of the housing market which abides by the law of demand and supply is discussed.
Price: the main determinant of the demand for houses is the process of the houses. Since house is a normal commodity and is considered to be an essential commodity, so with a rise in the price the demand for house will increase establishing the inverse relationship between them.
Population: as the population of the world is increasing, the demand for houses will increase. The increase in the population size is owing to the high birth rates and the increased level of migration across different parts of the world.
Income of the households: the increase in the national income as well as the disposable income will lead to an increase in the demand for house. The increase in the demand will give the individuals more purchasing power and they would be able to afford and purchase houses.
Interest rates: the interest rates offered by the banks and the money lenders initiate the purchase of house and increase the demand. Thus, the lower the interest rate, the cheaper is the interest payment which will increase the demand for houses. For example, the interest rate in the uk was as low as 0.5% which triggered the loans and mortgages in the country give the confidence to the purchaser of the house. This has increased the demand for houses. (imf.org, 2015)
Availability of credit: the low deposit norm and other formalities of the acquiring loans have eased out which gave the home buyers the benefit to buy houses easily. Thus, the easy availability of loans and mortgages has led to the increase in the demand for houses. (spence, 2015)
Expectations: the upward rising trend in the housing market encourages the buyers to speculate that the current purchase of the house would prove to be beneficial. Thus a bullish housing market will lead to an increase in the demand for houses. (bahadir and mykhaylova, 2014)
Price: the determining principle for the supply of houses is the price of the houses. As the law of supply suggests that with an increase in the price the supply of the houses will also increase. This proves that there is a positive relationship between the price and the supply of house.
Availability of land: the supply of new house building depends upon the availability of land. The population growth has exerted a pressure on the land which made it difficult for the house builders to acquire land for building house4s. This has led to the decrease in the supply of the houses in the world.
Cost: if the cost associated with the factors of production of house like the raw material and the wage of the masons increases then the supply of the houses would fall. (stevenson, 2008)
Government regulations: the legislations undertaken by the government of different countries can influence the supply of houses. The stern house building requirements will deter the house builders on the other hand if the regulations on the planning of the houses are relaxed then the supply of houses will increase. For example in london dockyards government had relaxed the house building regulation which speeded up the process of house building. (bates, giaccotto and santerre, 2014)
Subsidies: subsidies that are provided to the house builders might encourage them to build more houses which will increase the supply of houses. But in reality this is not the case. There was no proper structure of subsidies that led to a decrease in the supply of houses.
The demand for the houses and the supply of the houses intersect each to determine the equilibrium price and quantity. In the short run, it is assumed that the supply of the houses is relatively inelastic as it takes some time to build a new house, so the short run supply curve is a steeper upward sloping straight line. Whereas the demand for houses is negatively related to the price of the houses so the demand curve for the house is a downward sloping curve.
Diagrammatic representation of the equilibrium in the housing market is depicted below:
The equilibrium in the housing market occurs where the demand curve for house equals the supply of house curve. The point e is the equilibrium point from where the equilibrium price p* and equilibrium quantity q* is determined. (arnold, 2014)
It has been already discussed that the housing marketing is in disequilibrium due to the alarming increase in the demand for houses which has led to a situation of excess demand in the world. The excess demand for houses has raised the price of the housing. The boom in the housing market would disturb the economic balance of the global housing market. (amosweb.com, 2015)
Diagrammatic representation of the disequilibrium in the global housing market is depicted below:
The disequilibrium in the housing market is owing to the situation of the excess demand for houses indicated in the diagram. The demand for the house increased and the demand curve shifts to the right. Though the demand for the house increased the supply of the house remained constant at the initial level of equilibrium which has led to the situation of shortage of supply of houses. The situation exerted an upward pressure on the price as result the average price of the houses increased from p* to p1. It can also be seen that the quantity of the house has increased minimally from the q* to q1. Thus, there is clearly disequilibrium in the housing market.
There are four reasons behind the disequilibrium in the housing market which are discussed below:
Population- the first reason behind the disequilibrium is the tremendous growth in the world. There is not sufficient land for the new entrants into the world. The non-availability of land has limited the supply of the houses. Thus, there is a shortage of houses and excess demand for houses. Since the demand and the supply do not match with each other, hence there is disequilibrium leading to a rise in the price of the houses.
Low interest rate- most of the individuals purchase houses wither by taking loans from the banks or mortgaging some valuable asset. Now if the interest rate is lowered as in the case of uk, where the interest rate is 0.5%, the buyers gain the confidence to acquire loans and purchase houses. This is because low interest rate would keep the interest payment and the mortgage payments low. So the buyers would be able to take loans and buy houses. Again the demand for houses is high but the supply of the houses is limited due to the non-availability of land. The mismatch in the demand and supply of the houses causes disequilibrium in the housing market. (zabel, 2014)
Income- after the global financial crisis, the world is gaining pace and recovery has been taking place at a faster rate. The economic recovery has led to the improvement in the growth in the countries. This growth can be estimated from the rise in the national income and thus the disposable income of the individuals which have led to the increase in the purchasing power of the individuals. The individuals can new purchase more of the houses. This led to the increase in the demand for houses but the su0pply remained constant. Thus, there still remained disequilibrium in the housing market. (won-am park, 2014)
Bullish expectation- the above reasons that caused disequilibrium in the housing market has also caused the price of the house to be rising over the years. The bullish housing market has gained the confidence of the buyer regarding the beneficial expectation from this market. Thus, this positive expectation led to the increase in the demand for houses and thus again caused disequilibrium in the housing market.
The disequilibrium in the housing market can be removed or solved only when the supply of the houses will increase. The diagram representing the journey from disequilibrium to equilibrium of the housing market is depicted below:
If the supply of the houses will increase then the supply curve shifts leftward and the intersection of the increased supply and demand curve has occurred at e1 where the price has dropped to the original equilibrium position at p* but the quantity of the houses have increased much more than the
The process of house building must be fastened up. For example; uk government had initiated the home information packs that aimed to speed up the process of home buying.
The government must provide enough subsidies to the house builders. This would encourage them to increase the house building plans and thus, increase the supply of houses. Another aspect is the relaxation of the house building norms must be incorporated by the government in order to increase the supply of houses in the world. (abel, bernanke and croushore, 2014)
Conclusion:
The housing market is referred to have been a bubble market because it had experienced two major busts and booms in the past. In this paper the economics of the demand and su0pply of the housing markets have been presented along with the equilibrium in the market. The rise in the price of the houses is the global issue or the problem that must need urgent attending. The reason behind the price rise paved path for the disequilibrium in the housing market which is already discussed. Lastly, there are several solutions and recommendations that when implemented by the government will help to remove the bubble in the global housing market. (hyun et al., 2014)
References:
Abel, a., bernanke, b. And croushore, d. (2014). Macroeconomics. Boston: pearson.
Amosweb.com, (2015). Amosweb is economics: encyclonomic web*pedia. [online] available at: https://www.amosweb.com/cgi-bin/awb_nav.pl?S=wpd&c=dsp&k=market+disequilibrium [accessed 7 may 2015].
AndreÃŒÂ, c. (2011). Improving the functioning of the housing market in the united kingdom. Paris: oecd publishing.
Arnold, r. (2014). Microeconomics. Mason, ohio: south-western cengage learning.
Bahadir, b. And mykhaylova, o. (2014). Housing market dynamics with delays in the construction sector. Journal of housing economics, 26, pp.94-108.
Bates, l., giaccotto, c. And santerre, r. (2014). Is the real estate sector more responsive to economy-wide or housing market conditions? An exploratory analysis. The journal of real estate finance and economics.
Hyun, h., lee, h., park, m. And hwang, s. (2014). Housing market participants’ decision process and the dynamics of ripple effect on korean housing market – focusing on the cause of housing market stagnation and housing policies after 2008 global financial crisis -. Korean journal of construction engineering and management, 15(5), pp.147-159.
Imf.org, (2015). Housing markets, financial stability and the economy. [online] available at: https://www.imf.org/external/np/speeches/2014/060514.htm [accessed 7 may 2015].
Imf.org, (2015). Imf global housing watch. [online] available at: https://www.imf.org/external/research/housing/ [accessed 7 may 2015].
Priemus, h. (2014). Housing market reform agenda. Critical housing analysis, 1(1), p.1.
Spence, p. (2015). Mortgage approvals hit six-month high as house prices ‘set to rally’. [online] telegraph.co.uk. Available at: https://www.telegraph.co.uk/finance/economics/11503774/mortgage-approvals-hit-six-month-high-as-house-prices-set-to-rally.html [accessed 7 may 2015].
Stevenson, s. (2008). Modeling housing market fundamentals: empirical evidence of extreme market conditions. Real estate economics, 36(1), pp.1-29.
The economist, (2015). Location, location, location. [online] available at: https://www.economist.com/blogs/dailychart/2011/11/global-house-prices [accessed 7 may 2015].
The housing market. (2014). Economic outlook, 38(1), pp.59-60.
Won-am park, (2014). Global financial crisis and housing market in korea: characteristics and bubble test. Kukjekyungjeyongu, 20(4), pp.71-95.
Zabel, j. (2014). A dynamic model of the housing market: the role of vacancies. The journal of real estate finance and economics.
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