Real Estate Industry

Introduction

Real estate is a fixed, tangible and immovable asset in form of houses or commercial property (Seldin & Richard 1985). Real estate market involves developing, renting, selling/purchasing and renovating of these assets (houses). Market participants includes developers (contractors, engineers, and so on), facilitators (mortgage companies, real estate brokers, banks, management agents and so on), owners, renters (leasers) and renovators (Seldin & Richard 1985). Like other economic markets, real estate markets have internal and external forces that make impacts in the market (Seldin & Richard 1985).

Demand and supply forces have the major impact in the industry as they determine growth or decline in the market (Seldin & Richard 1985). Owner, renter and user are on demand side of the market that is they are consumers. Developers, financiers and renovators are suppliers (Acton et al 1999). Unlike commodities market demand and supply forces do not float easily. This is because of the uniqueness of this market. Real market industry has these unique characteristics, durability of products as buildings can last for decades or centuries. Each product (house) is unique in terms of buildings, location, and financing thus market has heterogeneous products (Acton et al 1999). Transaction costs are high and the process is usually long. Though there are mobile homes, but the land underneath is till immobile, real estate is an immovable asset (Acton et al 1999).

The main factor that affects demand in real estate industry is demographic features. The demographic variables include population size and growth, cultural background, beliefs and religion (Acton et al 1999). However, other factors like income, price of housing, cost and availability of funds, consumer preference, supplier’s preference, price of substitutes and compliments (Acton et al 1999).

Shift in supply of housing is affected by cost of using land, labor, building materials and other inputs like electricity (Pascal 1967). Price of existing houses and the technology of production also affect new supply here (Pascal 1967).

Price elasticity of house demand measures the sensitivity of price of houses due to changes in their demand (Pascal 1967).

PED (Houses) = % Price

% Units of Houses demanded

In the short-run the price elasticity of demand is high, however, in the long run the elasticity is not very high (Pascal 1967).