The real estate market works according to the laws of supply and
demand. When supply is greater than demand, prices fall. When demand is greater
than supply, prices rise. In this way, the real estate market is like any other
market. But several factors, including seasonality, durability, and locality,
set it apart.
Want to know more? We’ll break it down piece by piece.
What Is Real Estate?
Real estate is property
consisting of land, the buildings on it,
and any natural resources within the property boundaries, such as minerals,
water and crops. Real estate can be categorized into four types: residential, commercial, industrial, and
land.
Residential properties include structures for domestic residence
such as single-family homes, condominiums, townhouses, mobile homes, and
vacation rentals. Commercial properties include structures used to produce
income such as offices, stores, hotels,
services and other businesses.
Industrial properties include structures used for manufacturing,
such as factories, warehouses, and research centers. Generally industrial is
for the production of goods and commercial is for the distribution of goods. Land
properties include few or no structures such as vacant land, farms, ranches,
and reclaimed sites.
What Is the Real Estate Market?
The real estate market is all properties available for sale in a
given area.
Economic forces in a given area can cause an increase (or a
decrease) in the supply of properties. This can in turn cause prices generally
to fall (or rise). This is what people mean when they say the market is up or
down. For Example, the cost of accommodation in Ikoyi and Victoria Island could
not be compared to other places in Lagos.
What Drives Supply and Demand?
Supply and demand are driven by local and general factors.
Local factors, which may affect one market but not another
include:
·
Income – Income affects local
real estate demand. If incomes in a local area are high, people have more money
and are more likely to want to buy a house.
·
Job Availability – Jobs also
affect local real estate demand. If a city loses a major employer, those
workers will need to look for a new job. This will limit their ability to buy a
new home or get a home of their own. A minimum wage of N30,000.00 per month
will not fetch an average income earner a home in a location of choice.
·
Accessibility to Credit – In
some rural areas the nearest bank may be several hours away. This can limit demand
simply due to the difficulty in obtaining a loan. Federal Mortgage Bank should
do more in assisting low income earner to own a home of their own a little
interest of more 2%.
·
Land Constraints – Land
constraints are a classic example of a supply factor. There is very little room
on Victoria Island and Ikoyi to increase supply, so prices remain persistently
high.
·
Transportation – Easy access to
transportation can make a locality a desirable place to live, increasing
demand.
·
Retirees – An active worker
today, will invariably become a Retiree tomorrow, government should put in
place policies that could help an average worker to own a home during his/her
active days. One of the major problems
many retirees face after retirement is availability of conducive accommodation
in a conducive environment.
·
Upgrades – As families grow,
they often upgrade to a larger house. This can lower demand for small homes and
increase demand for larger homes. When a family of 8 is leaving a room and a
parlour is not ideal, but their meager income has created this environment where they have to manage
·
New Construction – New
Construction increases supply to the housing market by providing new properties
to be bought and sold.
·
Industrialization – A
location occupies by industries has the tendencies of high prices of
accommodation. A present the prices of accommodation in Ibeju Lekki is soaring
because of the anticipated development in this axis. Prices of accommodation will be astronically
high in another 5 to 10 years from now.
General factors or those that affect the real estate market as a whole include:
·
Inflation – Inflation affects a
consumer’s real income. When the price of goods and services rise, an
individual’s income is worth less, which limits his or her ability to purchase
a home.
·
Taxes – The federal government
has, at times, provided tax credits for first-time homebuyers. The latest
example was between the years 2008 and 2010 as a way to stimulate demand during
the recovery from the great recession.
·
Social Tastes – Owning a home
has long been seen as a social status symbol, which increases demand.
·
Investment – Property values
tend to rise over time, which make them an investment opportunity and increases
demand.
These are just some of the many local and general factors
affecting supply and demand in the real estate market.
What
Else Drives Real Estate Market Changes?
Much of the real estate market is driven by economic principles.
But not all of it. In the real world, there are
any numbers of drivers that can push people to buy or sell. There are fads and
styles. Think of wood paneling and the effect it has on the desirability of a
home today.
There are also family and business changes that may cause people
to relocate. There is also the fact that real estate is relatively illiquid,
meaning it is difficult to convert to cash.
It takes time and effort to buy or sell a home, which prevents
people from doing it more often.
Why
Is the Real Estate Market Unique?
It’s also true that the real estate market is unique. There are
several factors that separate the real estate market from a typical market.
Many of these factors have to do with real estate itself and how it behaves as
a good.
Durability
Real estate is not consumed in the way that many goods are. Instead,
real estate persists. And in many cases, it appreciates. This gives real estate
different properties than say, pizza. For example, real estate can serve as a
personal or family investment. Pizza, for all its benefits, cannot.
Locality
Real estate has many attributes that make prices and market
activity specific to one area. First, real estate is not portable. Unlike Crude oil,
which can be bought where prices are low and shipped to where prices are high,
real estate cannot be transported and stored. Second, human activity is
limited. Most of us spend the vast majority of our existence within a few kilometers of our home. This means the determinants of the value of that home are limited
to the area within those few kilometers. All of this serves to make real estate a
local good in which prices vary widely even within the same region.
