Housing Prices Essay Example | Topics and Well Written Essays - 1000 words

Housing Prices - Essay Example As it takes time for new housing to be constructed (in case of no overbuilding left from previous periods and thus existing housing stock being insufficient to meet the newly increasing demand) the supply cannot react fast to the demand shocks and thus increased prices will stay for some time until the supply is sufficient. Increased prices motivate construction firms to increase their output levels dramatically as the profit margins to be received from housing due to these high prices are expected to be high. That is why the real estate market is prone to known "hog cycles" or "herd behavior"2 where the construction companies overestimate the market demand and thus are myopic and construct too much supply. Other theories claim that actions of constructors to thoughtfully produce more than can consumed over short span of time are rational acts and are based on their trying to take advantage of economies of scale in production and thus economize on each unit of housing to be produced. Also, it is not irrational to have expectations of the economic upswing to be followed by some structural economic changes which will further lead to economic development or increase in the total population of the region due to this better economic conditions of living. Economic development is cyclical and the influence of the factor that lead to economic upturn has its' term. After the factor is not in power any longer, the economy starts stabilizing with real purchasing power not growing any longer. This is usually the time when the majority of the new housing supply comes on the market and it will be absorbed slowly with the prices dropping and vacancies occurring. The downward pressure on the market will sustain until the next economic upturn or until all the overbuilt housing supply is consumed. The biggest problem is that very often construction firm being overoptimistic about the housing or in general real estate prices develop land by using borrowed money. Once they bring on the market their product, the cycle is already in another stage which makes difficult for companies to generate enough income to pay back their loans. The highest risk of overproduction exists in real estate segments where the construction terms are the longest, demand is most uncertain and construction is irreversible. That is why some developers try to eliminate the risk and deliver to the market not niched products but ordinary housing. This further aggravates the crisis as the stock becomes not varied and overproduction is especially significant within some segments of the market. The similar situation was observed during famous real estate which lead to banking crisis in Sweden in 1991 and was also considered a global real estate crisis with numerous international investors being in the market. The theory behind the occurrence of International housing cycles is the interrelationship of overall economic development in the different global regions and due to this increased interrelationship between economies investors find