Demand
The main determinants of the demand for housing are demographic. However other factors like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes and price of compliments all play a role.
The core demographic variables are population size and population growth : the more people in the economy, the greater the demand for housing. But this is an oversimplification. It is necessary to consider family size, the age composition of the family, the number of first and second children, net migration (immigration minus emigration), non-family household formation, the number of double family households, death rates, divorce rates, and marriages. In housing economics, the elemental unit of analysis is not the individual as it is in standard partial equilibrium models. Rather, it is households that demand housing services: typically one household per house.
Income is also an important determinant. Many housing economists use permanent income rather than annual income because of the high cost of purchasing real estate. For many people, real estate will be the most costly item they will ever buy.
Supply
Housing supply is produced using land, labour, and various inputs such as electricity and building materials. The quantity of new supply is determined by the cost of these inputs, the price of the existing stock of houses, and the technology of production.
For a typical single family dwelling in suburban North America, approximate percentage costs can be broken down as:
• acquisition costs 10%
• site improvement costs 11%
• labour costs 26%
• materials costs 31%
• finance costs 3%
• administrative costs 15%
• marketing costs 4%
Multi-unit residential dwellings typically break down as:
• acquisition costs 7%
• site improvement costs 8%
• labour costs 27%
• materials costs 33%
• finance costs 4%
• administrative costs 17%
• marketing costs 5%
Public subdivision requirements can increase development cost by up to 3% depending on the jurisdiction. Differences in building codes account for about a 2% variation in development costs. However these subdivision and building code costs typically increase the market value of the buildings by at least the amount of their cost outlays. A production function such as Q=f(L,N,M) can be constructed in which Q is the quantity of houses produced, N is the amount of labour employed, L is the amount of land used, and M is the amount of other materials. This production function must, however, be adjusted to account for the refurbishing and augmentation of existing buildings. To do this a second production function is constructed that includes the stock of existing housing, and their ages, as determinants. The two functions are summed yielding the total production function. Alternatively an hedonic pricing model can be regressed.
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