June 8, 2023


Mad about real estate

The Principle Of Supply And Demand On Property Values

When applied to real estate, the principle of supply and demand refers to the ability of people to pay for housing coupled with the relative scarcity of real estate. For any type of good or service to have value in any marketplace, it must possess four characteristics: demand, utility, transferability and scarcity. Demand is a need or desire coupled with the purchasing power to fill it, whereas utility is the ability of a good or service to fill that need. Scarcity means there must be a short supply relative to demand. Air, for example, has utility and is in demand, but it is not scarce. Finally, a good or service must be transferable to have value to anyone other than the person possessing it.

In evaluating a property’s value or potential worth, attention must be given to such matters on the demand side as population growth, personal income, and the tastes and preferences of people. On the supply side, one must look at the available supply of real estate housing and its relative scarcity. When the supply of real estate housing property is limited and demand is great, the result is rising land or housing property value prices. Conversely, where land is abundant and there are relatively few buyers, housing supply and demand will be in check or balanced at only a few cents per square foot.

The principal of change serves as a reminder that real property uses are always in a state of change. Although it may be imperceptible on a day to day basis, housing supply and demand change can easily be seen when longer periods of time are considered. Because the present value of property is related to its future uses, the more potential changes that can be identified, the more accurate the estimates of its present worth.