Increase in Housing Prices: Key Factors
Among the key factors driving the increase in prices, the effects of demand, supply constraints, and the impact of global factors stand out.
An IMF article published in December 2024 by Hites Ahir analyzes the issues of housing affordability and its constant price increase, examining fundamental economic and global factors that influence the real estate market. Its final conclusions can be perfectly applied to the Spanish housing market.
Among the key factors driving price increases, the effects of demand, supply constraints, and the impact of global factors stand out.
Demand Factors
Among demand-related factors, it is important to consider that housing serves as both a consumption good and an investment, making it susceptible to social expectations regarding its future appreciation. Additionally, real estate markets can enter bubbles due to the belief that prices will always rise, as economist Robert Shiller pointed out before the 2008 financial crisis. Lastly, more flexible lending standards can accelerate price increases, while credit restrictions can slow them down.
Supply Constraints
Housing construction requires permits, financing, and time. For example, Canada needs 500,000 new homes per year to balance its market but builds less than half of that. Land-use regulations restrict construction and increase costs. Cities with strict regulations, such as New York, have significantly higher prices compared to cities with more flexible regulations, such as Houston.
Impact of Global Factors
Foreign buyers and capital flows influence supply and demand in several countries. Foreign investments in cities like London have pushed up luxury housing prices. In response, some countries have implemented restrictions on foreign buyers to prevent speculation and protect local residents' access to housing, as seen in New Zealand and Canada.
Real Estate Market Management Policies
Governments implement real estate market management policies to control mortgage credit availability and reduce financial risks. These include limits on the debt-to-income ratio or loan-to-value ratio. Central banks can adjust interest rates to increase mortgage costs and curb demand, although this is a broad measure that impacts the entire economy.
Conclusion: Addressing the Root of the Problem
The article concludes that while factors such as credit policies and market expectations influence housing prices, the core issue is the lack of supply. Effective solutions must focus on:
Increasing housing construction
Streamlining permit processes
Easing land-use regulations
These measures are essential to reduce the supply-demand gap and stabilize the housing market.
CMC Real Estate Consulting
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