Macroeconomics | BBE | Lesson 15 | Factors Housing Demand |Real Interest Rate | Credit Availability

This lesson explains Residential Investment and the factors leading to Housing Demand. It is important for the 4th semester macroeconomics BBE students of Delhi University. It is relevant for other courses like BBA, Economics hons, for the graduation and post graduation level and for competitive exams like CUET Economics, IAS economics optional, Indian Economic Service and the NET JRF Economics aspirants.
Residential Investment
When the demand for housing shifts, the equilibrium price of housing changes, and this change in turn affects residential investment. The demand curve for housing can shift for various reasons:
An economic boom raises national income and leads to the increase in the demand for housing.
A large increase in population, may be because of immigration leads to the increase the demand for housing.
An expansionary shift in demand raises the equilibrium price. This inturn increases the residential investment.
Determinants of Housing Demand
One important determinant of housing demand is the real interest rate. This interest rate is the cost of the loan.
Even the few people who do not have to borrow to purchase a home will respond to the interest rate, because the interest rate is the opportunity cost of holding their wealth in housing rather than putting it in a book.
A reduction in the interest rate leads to an increase in the housing demand which increases the housing prices and further leads to an increase in the residential investment.
Another important determinant of housing demand is Credit Availability.
When it is easy to get a loan, more households buy their own homes, and they buy larger ones than they otherwise might, thus increasing the demand for housing.
When credit conditions become tight, fewer people buy their own homes or trade up to larger ones, and the demand for housing falls.
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