What is a Housing decision?

A housing decision is a decision made by a prospective buyer to purchase a shelter for him and his family. House constitutes one of the basic needs of an individual other than food or clothing. A house is bought by an individual for his comfort and safety. An individual takes a lot of factors into consideration while deciding to buy a house. These factors differ due to differences in the economic conditions of the country. There is a high demand for houses and different options are available to choose from. An individual may buy a house for personal or commercial use. There are several factors to take such decisions.

Factors affecting the Housing decision

An individual considers many factors before making a housing decision. These factors depend on the economic conditions of the buyer and the demographic conditions of the country in which the house is to be bought.

• Demographic, social, and psychological profile

  The demographic profile of people with different age groups or different family sizes often impacts the purchase decisions of the house. For a joint family, a house with more space and area is given more preference. As well, the social life of an individual also affects the size of the house. If there are frequent visits of the guests in the house, the individual preference goes with a house with more rooms.

• Incomes of the households

  When the income of the individual is high, the spending on real estate increases. The person tends to invest in this market to increase his wealth. The incomes nowadays may also be high because both the members of the family are earning. This is a factor affecting the purchase decision. Low-income buyers usually find it difficult to purchase a house.

• Rents

  The expenditure that is incurred on renting the house is a factor that may impact the housing decisions. If the rent to be paid is higher than what is acceptable, the individual’s preference is to purchase the house and vice-versa. The rent to be paid depends upon the geographical location of the house.

• Lower interest rates

  Housing finance is usually available at interest rates. When credit is provided at lower interest rates, there is a surge in the home loan applicants. Similarly, when interest rates are high for home loans, fewer people think about purchasing a house. Therefore, the interest rate becomes a critical factor that affects the purchase decision of an individual.

• Large scale credit availability

  If credit is available in the market at a large scale, then more housing markets can experience a boom due to the higher number of buyers. The number of buyers would significantly increase as large-scale credit availability means fewer regulations. Many people would be able to purchase a house pertaining to the fewer regulations. Large-scale credit availability is a factor that can infuse more buyers in the housing market.

• Speculative demand

  Some investors or consumers purchase the house property rather than equity or debts to invest to gain wealth or profits. If it is expected that the prices of the real estate will increase in the future, the consumers tend to purchase more of it and if it is expected the prices will go down, the consumers or the investors sell their existing property. Speculation motive thus becomes a factor affecting the housing decision.

• Taxation influences

  While repaying the housing loan, the borrower is often provided with the tax benefit equal to the amount he has borrowed for financing the house or the interest amount paid by him. This factor also impacts the housing decision of the individual.

Buying or Renting

Individuals usually want to purchase a house for their living. If an individual is unable to purchase a house for any reason, then there is always an option of renting a house. The renting method involves possession of the house without transfer of the ownership. The rented house is usually an unsold house that is lent to the interested party. The renting includes a small amount to be paid whereas buying a house includes a larger amount. The decision to buy or rent a property depends upon the time one has to occupy the house. If the period is longer, one could go for buying taking into consideration various factors as discussed above whereas if the period is short in nature or short-term, then renting could be given more preference.

Financial considerations in housing decisions

When a homebuyer goes for financing the house purchase, then he/she needs to consider various factors before choosing the mode of finance. The factors include down payment, periodic payment, time duration for the loan, and the interest rate. When the down payment is higher, the interest that is to be paid on the remaining sum is less. However, the purchaser must focus on maintaining adequate liquidity when purchasing the house for the first time. Secondly, the periodic payment or the EMI is also one factor that must be considered. A higher periodic installment means the loan would be paid off early whereas a lower periodic amount means that it would take longer for the borrower to pay off the loan. Another factor to be considered is the duration of the loan. Longer duration means more interest payment whereas shorter duration means less interest payment. The interest rate at which the financing is available must be affordable. Interest payment would be more if a loan is stretched for a longer duration. The lower interest rate is an incentive for home buyers. The individual or company that is taking the finance must have a decent credit score so that one could easily qualify for the mortgage.

Housing markets across different countries

The housing market in different countries is in different stages and scenarios due to different economic conditions. In countries like Germany, France, and Italy, the affordability of apartments has gone done which has impacted the housing market of these countries. House prices have seen a surge in prices in countries like South Korea as the interest rate charged in the country is quite high. Canada has restricted the buying of houses by foreign buyers in their country. In Malaysia, residential housing forms a major part of the real estate market. The house prices in Malaysia are also rising which has become a major problem. Apart from the house prices, the income of the people in Malaysia is also falling which leads to the non-affordability of the individuals to purchase a house. The government of Malaysia and other countries are aiming to improve the affordability of the houses and bring down the rate of interest of the finances. Malaysia provides affordable housing to the students of ten colleges located in the University of Teknologi, Malaysia.

Context and Applications

The aspiring students can pursue further specialization in this field into the following streams:

• Bachelors in Construction Engineering
• Bachelor of Science in Manufacturing Engineering
• Masters in Construction Engineering
• Masters of Science in Manufacturing Engineering

Practice Problems

Question 1: Which of the following is not a purpose of purchasing the house?

1. 1. A housing property is used for living.
   2. A housing property is used to keep as a mortgage.
   3. A housing property is used for commercial purposes.
   4. A housing property is used for investment purposes.

Answer: (b)

Explanation: A housing property is not purchased for keeping it as a mortgage but it is a situation that may arise wherein it can be used as a mortgage.

Question 2: Which of the following factors influences the housing decision?

1. 1. Income of the consumer
   2. Rents payable
   3. Demographic profile
   4. All of the above

Answer: (d)

Explanation: All of the above-said factors impact the housing decisions of the ones purchasing the house.

Question 3: Which of the following is not a problem in the real estate market in different countries?

1. 1. Low house prices
   2. High house prices
   3. Heavy interest rates on financing
   4. Non-affordability of real estate

Answer: (a)

Explanation: The prices of the property are rising rather than falling. Therefore, the low price of the property is not a problem for the country.

Question 4:  Which of the following is not a factor of financial consideration?

1. 1. The investor needs to consider the down payment to be made.
   2. The credit score of the one who is financing its house must be good.
   3. The house purchased must be big.
   4. The interest rates must be low.

Answer: (c)

Explanation: The small or a big house is not a concern in the financial consideration. Therefore, this is incorrect.

Question 5: At what interest rates is the financing of housing property is given more preference by the individual?

1. 1. Low-interest rates
   2. High-Interest rates
   3. Equal to 20% p.a.
   4. At any interest rate

Answer: (a)

Explanation: The financing of the house property is done if the interest rates are low. The magnitude of the interest rate is not fixed as 20%, 10%, or any other. The interest rate is not irrelevant for the financing decisions.

Common Mistakes

It is often observed that the students ignore this topic. It is one of the important topics that is considered by any country. The housing decision is one of the basic needs of the individual that also becomes relevant. 

Related Concepts

While studying the factors affecting housing decisions, it is important to read the following topics to get a better knowledge:

• Real estate market
• Financial system
• Housing plans and development
• Banking – housing loans
• Investment consultancy