English
Supply and Demand Dynamics: Core Principles in Real Estate Markets
Supply and Demand Principles
The value of real estate in a competitive market is determined by the relative❓ levels of supply and demand. Supply refers to the number of properties available for sale or rent, while demand represents the number of buyers or renters willing and able to purchase or rent those properties. A property’s value increase❓s when demand exceeds supply and decreases when supply exceeds demand. The relationship can be represented as P = f(D, S), where P is the price, D is the demand, and S is the supply.
Impact of Supply and Demand in the Housing Market
Increased demand can lead❓ to either increased construction activity if land is available or rising prices if supply is limited. decreased❓ demand results in lower prices and reduced construction.
Impact of Supply-Side Factors
Overbuilding, where numerous construction companies saturate the market, causes prices to decline. Restricted supply, such as zoning laws preventing new development, can increase the value of existing properties.
Role of the Real Estate Appraiser
A real estate appraiser must be knowledgeable about the supply and demand dynamics in their area of expertise and aware of the factors that cause these dynamics to change over time.
Other Basic Principles
The principles of substitution, competition, change, and anticipation influence supply and demand.
Principle of Substitution
A property’s value cannot exceed the cost of equivalent substitutes available in the market. Rational buyers compare similar properties and choose the least expensive that meets their needs. Appraisers apply this principle in sales comparison, cost, and income capitalization approaches to value. Appraisers must know what constitutes an equivalent property in a given market.
Principle of Competition
Supply and demand are balanced due to market competition. Competition occurs when supply and demand are imbalanced. When supply exceeds demand, sellers compete for buyers, driving prices down. When demand exceeds supply, buyers compete, driving prices up. Excessive competition can negatively impact value.
Principle of Change
Supply and demand are constantly changing in response to social, economic, and other factors. Appraisers must value properties as of a specific date. The market conditions at the time of sale of comparable properties must be considered, and adjustments made for any market changes between the dates of sale and the valuation date. Changes in real estate are often described in terms of the real estate cycle: development, stability, decline, and revitalization. Gentrification is an example of revitalization.
Chapter Summary
The principle of supply and demand❓ is a cornerstone in understanding real estate markets and determining property❓ value. Property value in a competitive market is determined by the balance between supply (number of properties available) and demand (number of buyers). Value fluctuates based on this balance. When demand exceeds supply, prices rise, and vice versa.
In the residential real estate market, high demand leads to increased supply if vacant land is available for construction, or to rising prices if supply is limited. Conversely, decreased❓ demand lowers prices and new construction activity.
Excess supply (overbuilding) leads to price declines due to many competing properties. Limited supply, due to zoning laws restricting new development, leads to higher values for existing properties.
Real estate appraisers must be aware of supply and demand levels and the factors affecting them.
The supply and demand principle works due to the principle of substitution, meaning a property’s value cannot exceed that of comparable alternatives. Buyers compare similar properties and choose the least expensive that meets their needs. Appraisers use this principle in valuation. Competition arises from imbalances in supply and demand; sellers compete when supply exceeds demand, and buyers compete when demand exceeds supply. Competition restores market balance. The principle of change recognizes that supply and demand are constantly changing due to socio-economic changes, requiring appraisers to estimate value at a specific date.
The real property life cycle involves development (increasing values), maturity (stable values), decline (decreasing values), and revitalization❓ (increasing demand and values).
Understanding supply and demand dynamics is crucial for real estate investors and developers to make informed investment and development decisions, assess risks, understand price changes, and predict future prices.
