- Population and demographic factors. The demand for housing increases when the population size increases. Other than natural birth and death rates, the number of migrants affects the population size. One additional important factor that affects the population size is the rate of household formation. For example, newly married couples have a high demand for flats. Hence, demand generally rises with the rate of household formation. The increases in demand take the form of movement to bigger and better houses, or even buying second homes.
- Income. As real incomes rise, demand for housing will rise. Housing is a normal good; that means it is a commodity for which demand increases with income. An increase in income means that people want to have better housing services, such as larger flats or a better environment. Over the last three decades, Hong Kong has enjoyed consistent growth in the real per capita GDP, implying a continuous increase in demand for housing.
- Price expectation. The quantity demanded decreases as the current price increases. However, when people expect the future price of a flat to increase, they want to demand more flats at any given price. Hence, the demand increases as the expected future price increases.
- Personal wealth. Wealth is the total amount of assets and cash that a person has. Sometimes, the expected future income can also be counted as a part of wealth. At any given price of a flat, the more wealth a household has, the higher the demand for housing.
- Interest rate and credit availability. Since most households use a bank loan to finance the purchase of a house, the availability and the interest rate level of credit is crucial and mortgage payments plays an important role in the demand for flats. Note that there are many interest rates in the market. If you take out a tax loan from a bank, the interest rate is likely to be low. Even lower, however, is the interest rate you get when you deposit money in your savings account. When you take out a personal loan from a bank, the interest rate is much higher. When you borrow cash in advance using your credit cards, the interest rate is still higher. What matters here for the housing demand is the mortgage rate, the interest rate at which you pay your house mortgage. However, different interest rates are related in some systematic ways. For example, the mortgage rate in 2000 was the prime rate minus one percent. Therefore, it often suffices to look at the prime rate or the best lending rate as a proxy for the mortgage rate.
- Price of substitutes. If some wants a place to live and does not want to purchase a house, he or she can rent a house. Hence, renting a house is a substitute for purchasing one. However, if someone buys a house for investment, the rental income also affects the property price. If the rental rate is high, then the demand for house purchasing will rise.
Determinants of housing supply
- Price expectation. Building a new building takes some time. The price that is relevant to a developer is the price he expects to sell at when the project is completed. If a developer is optimistic about future prices, then he will supply more flats for a good expected profit.
- Cost of building. As costs rise, and if prices remain constant, profits fall and thus developers cut back on their supply of flats. Again the relevant concept of costs involves elements of expectations for resources that are used late in the building process. Costs generally include land, and construction (labour and materials) and financial costs. The supply of flats also depends on the supply of land from the government in Hong Kong.
- Interest rates and credit availability. Since most developers borrow money for their operation (financial costs), the interest rate level for credit will directly affect the cost of building. If the interest rate increases, then the costs of building increase and the supply of housing will fall.
Source: "ECON A203 - Hong Kong Economy", OUHK (2017)
