5.3.1 Characteristics and determinants of demand
Residential construction is a vital sector o f the national economy, accounting for 5 per cent o f GNP,
30 per cent o f fixed investment, and 3 per cent o f the national labour force (Rosen, 1979). Housing,
the product o f the residential construction sector, is the single most important item o f expenditure
o f an average household. The extreme cyclical volatility o f new housing construction is a pervasive
characteristic o f the sector. Hence, residential construction plays an important role in efforts to
stabilise the national economy. It tempers excess demand during periods o f expansion, and often
leads the economy-wide recovery from recession. However, the periodic cychcal declines in new
housing construction are costly to both the construction industry and the society. Decline in
production and employment in the residential construction sector results in both the industry
operating below capacity and the rise in unemployment.
Demand for residential buildings is to a substantial extent determined by the need for new housing as a whole. Housing need is generally the main factor which creates housing demand. However,
housing need is different from housing demand. The need only becomes an effective demand when
it is accompanied by the ability to finance the purchase. In the longer term, the markets for new housing are created by the need for more houses than are currently available. Hence, the amount and
condition o f existing housing stock also influence the extent o f this need.
The overall housing market can be divided into three distinct sub-markets: owner-occupied housing;
pubhc sector housing; and rented housing. Within each sub-market, there are also single and multi family units. This heterogeneous characteristic o f the housing market has created complexity and
difficulty in estimating housing demand.
The provision o f a satisfactory supply of housing is o f great concern to any government.
Determining the level o f supply and demand in both the public and private sectors is a vital task for
the government. Generally, there are several factors which affect demand for all types o f housing.
In the long term, the most important influences on the general demand for housing are: the size of
o f economic growth. Effectively, the faster the rate o f new household formation, the greater the
demand for housing; and the higher the income earned in an expanding economy, the greater the
demand for bigger and better houses owing to increasing standards o f living.
5.3.2 A review of associated economic and social factors
The reahsation that the housing cycle is costly to both the construction industry and the society has
stimulated substantial research into the causes o f short-run fluctuations and the factors that affect
demand for housing construction.
Rosen (1979) focused his attention on the causes o f cyclical fluctuations in residential construction,
and in the process highlighted several important issues concerning housing demand. Firstly, he
attributed the cyclical pattern o f demand to the overwhelming dependency o f housing on mortgage
credit and to deficiencies in the housing finance system that provides mortgage credit. The high
capital costs and the extreme durability o f the housing product have made debt financing central to
the housing market; the household must rely heavily on borrowed fimds to purchase housing.
Secondly, he emphasised the role o f the supply o f mortgage credit. He explained that the rationing
or disequilibrium characteristic o f the mortgage market is responsible for the difficulty in obtaining mortgages during periods o f financial restraint. This happens when the supply o f mortgage funds
does not equal the demand for mortgage funds at the market interest rate. During these periods,
many households are not able to obtain any mortgage at the quoted interest rate. The characteristic
disequilibrium o f the mortgage market has, in turn, led to a primarily institutional explanation for
short-run housing cycles. Thirdly, he recognised the influence o f the cost o f mortgage funds on the
housing cycle. He highlighted that housing and mortgage demand have traditionally been viewed
as the most interest-rate sensitive sector of the economy and, hence, the movements o f mortgage rate
do influence demand and. in turn, affect the cycle. Fourthly, he considered savings deposits as a vital
source o f mortgage credit and the amount of deposits is a major determinant o f the level o f mortgage
availabiht}'. Finally, he concluded that governments have made substantial attempts to moderate the
fluctuations in new residential construction using public policy that regulates mortgage availability
and cost.
Also pertaining to the residential building cycle. Hall and Richardson (1980) found that the major
factor that affects builders' perception o f demand is the number o f loans made to first-time home
purchasers. In turn, this depends on monetary issues such as average bank deposits, average
H illebrandt (1974), Ofori (1990) and Chemiavsky (1990) examined demand for housing at two
différent levels; basic and economic. The determination o f the basic level o f demand is based on the
total need for new housing. Need is defined by Hillebrandt as the difference between an accepted
standard o f housing provision and the extent to which the stock reaches this standard. It is
dependent on requirements for net new household formation; requirements to replace dwellings
cleared in slum-clearance schemes and for other purposes such as road building; and requirements
to increase the stock in relation to existing households to provide a margin o f vacant dwellings for
mobihty. In short, the two main determinants o f basic demand for housing are population factors
such as, age structure, household formation and marriage rate; and characteristics o f the existing
housing stock. This need assessment assumes that certain standards o f housing provision are to be
achieved and these standards are often laid down by the government. In essence, this implies that
the need-based approach is more applicable for determining demand for public housing. On the
other hand, demand for private-sector housing is regarded as economic demand by the three writers.
In this respect, economic factors play a more important role in influencing the level o f demand.
Hillebrandt cited personal disposable incomes; the level o f unemployment; relative rates of increase
in wages and salaries; supply o f credit or savings; and changes in the rate o f interest as the main
determinants o f demand for private housing. In addition, Ofori highlighted several other economic
factors in his study of the Singapore residential market. They are: the prevailing property prices; the levels o f housing provision by the public sector; and government incentives for private developers
such as grants, subsidies or tax incentives. These factors were also cited by Chemiavsky in his study
o f effective or economic demand for private housing in Israel.
Some studies examined housing demand in general without making a distinction between the public
and private sectors. Briscoe (1988) and Ruddock (1992) cited both economic and social factors as determinants o f demand for overall residential constmction. Firstly, household formation is
considered as having a long-term influence over the demand for housing. Demand arises mainly
from new marriages and also from their breakdown when households are split up. In addition,
migration and immigration also affect demand as households move to another area to seek
employment. Secondly, family income, both the amount o f current and future expected, also
determines a family's willingness to spend on housing. As incomes increase, it is generally the case
that people are able to afford owner-occupied housing. Thirdly, the prices of houses also affect the
type of housing demanded and the general level o f demand. Rising house prices may cause people
to look towards smaller property for purchase or even delay their purchases. Fourthly, the cost and
availability o f finance is again cited as an influencing factor as most households have to rely on a mortgage loan to finance their house purchase. Finally, other factors mentioned include the
distribution o f income, the rate of economic growth and unemployment, size o f housing stock,
personal taste and preferences, and government intervention. Factors similar to these were also highlighted in an earlier study by the National Economic Development Office (1984) on the
prospects for construction to 1990 in the UK. In relation to general housing demand, the influencing
factors considered were new household formation rates, interest rates, real income growth, changing
demogr^hic and social trends, provision o f credit finance, fiscal support, government spending and
availability o f financial incentives for housing. However, it was noted that with regard to owner-
occupied or private housing, the two decisive factors are interest rates and growth o f real incomes.
A few writers only focused their attention on the private housing market. In this respect. Stone
(1983) only identified economic factors as having an influence over private housing demand and they
consist o f the rate of interest, the availabihty of mortgage, the rate o f inflation, prices o f property and
the level o f real income. Although Raftery (1991) also considered only private sector or owner-
occupied housing demand, the influencing factors were not restricted to economic ones. They
include: size and condition o f existing housing stock; demographic change; the rate o f real interest;
and the level o f household disposable income. Therefore, in essence, there is no clear distinction
between the factors that affect public and private housing demand.
At a quantitative level, several studies were undertaken to model demand for residential construction based on economic and social factors. Tang et al. (1990) applied independent variables such as, national income per capita, relative price index, size of population, rate o f household formation and
interest rate in their model o f Thailand's residential construction demand. However, the analysis
found that household formation did not have a significant effect on demand and was excluded from
the model. In another study, Akintoye and Skitmore (1994) tested the significance o f some economic
variables against private housing demand in the UK. They found that measures o f construction price
level, national output and real interest rates were suitable modelling variables, while those of
unemployment and manufacturing profitability were insignificant. In a recent study o f demand
modelling for residential construction in Singapore, Goh (1996) identified several significant
economic indicators that are related to demand. They are: GDP per capita; GFCF for construction
and works; real GDP; building material price index; money supply (M2); money supply (savings and
others); Central Provident Fund (CPF) withdrawal for home-ownership; prime lending rate;
consumer price index; property price index for residential property; labour force; and unemployment
rate. The indicators that were found to be insignificant are: number o f marriages registered; number
5.3.3 Identification of economic indicators
Based on the economic and social factors highlighted as having an influence on demand for
residential construction, economic indicators that measure these factors can be identified. Table 5.1
hsts down these economic and social factors together with their corresponding economic indicators.
Table 5.1 Factors and their corresponding economic indicators identified for residential construction demand
Economic and Social Factors Economic Indicators
a) Econom ic growth a) Real GDP; GDP per head; and Productivity b) C ost of borrowing b) Interest rate
c) Family formation c) H ousehold formation d) Population size d) Population
e) Property price e) Property price index
f) Level of incom e f) D isposable incom e; GDP per head; and W ages and earnings
g) Level of unem ploym ent g) Unem ploym ent
h) Existing housing stock h) Housing stock (Additions) i) G overnm ent intervention i) Planning approval issued
j) R ate of inflation j) C onsum er price index; and GDP deflators k) Construction price k) Building te n d e r price index; and Building
material price index
1) M ortgage credit availability 1) Money supply; National savings; and Bank lending