Unit 3: Application of the Law of Demand and Supply

Lesson 3.4
The Impact of Increase of Prices of Basic
Commodities to Housing Shortage, Rent and Housing
Price Structure

Contents

Introduction 1

Learning Objectives 2

Let’s Connect 3

Discover 4
Employment and Housing 4
Income and Basic Commodities 6
Taxation on Housing 6

Wrap-Up 8

Try This! 9

Challenge Yourself 10

Photo Credit 12

Bibliography 12
Unit 3: Application of the Law of Demand and Supply

Lesson 3.4
The Impact of Increase of Prices of
Basic Commodities to Housing
Shortage, Rent and Housing Price
Structure

Introduction
Consumers spend their money on various goods and services, and the biggest expense
often goes to rent or mortgage payment.

Whether it be house purchases or rent, both of them are subjected to the law of supply
and demand. If house prices go down, the quantity demanded for housing will increase,

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 1
Price Structure
Unit 3: Application of the Law of Demand and Supply

holding other variables constant. If house prices go up, the quantity supplied for housing
will increase, holding other variables constant. However, other variables can also affect the
supply and demand of housing.

In this lesson, we will be looking at how the concepts of supply and demand are applied in
housing. We will also be looking at other factors that affect the housing market and its
influence on house and rental prices.

Learning Objectives DepEd Learning Competency

At the end of this lesson, you should be able to
In this lesson, you should be able to do the compare the prices of commodities and analyze
following: the impact on consumers (ABM_AE12-Ie-h-6).

● Explain how the concepts of

supply and demand are used in
the housing market.
● Discuss how the different factors
affect house purchase and rent
prices, as well as housing
shortage and surplus.
● Discuss the effects of commodity
prices, real property tax, and
prices of construction materials
on housing prices.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 2
Price Structure
Unit 3: Application of the Law of Demand and Supply

Let’s Connect

Rent or Buy? 10 minutes

Deciding whether to rent or buy a house involves a deliberate consideration of several

factors. In this activity, you are going to explain the reason why individuals either decide to
buy a house or just rent one.

Instructions
1. Ask two to three relatives about their perspectives on buying or renting a house.
2. Note the factors that influence their decision to buy or rent.
3. Answer the following guide questions based on what you have observed in your
family’s or relatives' choices on whether to buy or rent houses.

Guide Questions
1. If house prices increase, what will happen to the quantity demanded for houses?
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

2. What are the factors that prevent a family from purchasing a house? Name at least
two factors.
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

3. Why are we experiencing growth in high-rise and medium-rise condominium

development in the cities?
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 3
Price Structure
Unit 3: Application of the Law of Demand and Supply

Discover
The law of supply and demand affects the prices of rent and house purchases in an area. In
cities that have a booming economy, the demand for houses, apartments, and
condominiums is high. While housing supply is constant, the increasing demand pushes the
prices of rent and house purchases up.

How will an increase in the prices of basic commodities

affect rent and house prices?

Employment and Housing

The influx of skilled workers in cities with rising economies is increasing the demand for
housing. When these skilled workers are paid more, their income enables them to rent or
buy a house in the city they are working. We see this happening in highly urbanized cities,
where the proliferation of workers has created a high demand for housing. The increased
demand for housing in these cities is pushing the price of rent and house purchases to
increase.

The high demand for housing in growing cities creates a shortage of it. Because the
quantity demanded for housing is higher than the quantity supplied, prices are pushed
upward. At the same time, these prices attract property developers to build more houses,
apartments, or condominiums, thus increasing the supply of housing. The point where the
quantity demanded and quantity supplied for housing intersect will be the property’s
market equilibrium.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 4
Price Structure
Unit 3: Application of the Law of Demand and Supply

Fig 1. An increase in demand for housing will cause a shortage of housing that will
ultimately result in a price increase.

Check Your Progress

What happens to the supply and demand of housing in cities with
growing economies?
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________

Meanwhile, in shrinking cities or cities with weak economies, there will be a housing surplus
because of inadequate housing demand, causing the abandonment of houses or apartment
buildings. If there is more available housing than there is a need for it, it will result in a price
decrease. It also discourages developers from building new houses or maintaining existing
houses.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 5
Price Structure
Unit 3: Application of the Law of Demand and Supply

Income and Basic Commodities

Economic growth causes an increase in personal income. Cities with higher income also
have higher prices for their basic commodities. Since individuals in cities with high economic
growth tend to have more money to spend on goods, higher demand for all commodities
will occur. It causes a shift in the demand curve, which will result in higher prices, ceteris
paribus.

If there is a high demand for commodities, it will increase the need for shops or business
spaces, therefore increasing the demand for rental spaces for business use. The higher
demand for rental spaces will result in the conversion of housing spaces into business
spaces. This will then decrease the supply of housing. In this circumstance, while demand
for housing is high, it will push housing prices up.

The increased commodity demand increases the demand for business space rentals.
Therefore, prices for housing also increases. An increase in the prices of basic commodities
will ultimately increase house prices and housing rent costs.

Included in housing construction are the different materials and labor in the construction
business. Housing and rental spaces are final goods, while the input needed to create them
are intermediate goods. An increase in housing demand (final goods) causes an increase in
the demand for input (intermediate goods) needed to provide housing. If there is an
increase in the demand for input, and while considering other variables constant, it will
push input prices up. The increase will subsequently result in high housing prices.

Taxation on Housing
Real property taxes in the Philippines are fixed by the local government. The Local
Government Code of 1991 gives the taxing authority to the local government to prevent
double or multiple taxations. In cities, properties are taxed at 2% of the assessed value,
while in the provinces, property tax is at 1% of the assessed value. The higher the assessed
value of the property, the higher the amount of taxes.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 6
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Unit 3: Application of the Law of Demand and Supply

If the general location has a low property tax rate, more people are encouraged to buy and
rent properties. However, over time, as people settle down and build businesses, the area
can develop and turn into a city. When this happens, the government will reclassify it, and
therefore, the area's property tax can go up. In this case, property prices will appreciate.

Another factor that can affect housing demand is the interest rate or mortgage rate, in
real property terms. A low interest rate can shift the demand curve to the right (increase)
since most housing is bought using borrowed funds. A decrease in interest rate will reduce
the cost of financing and will encourage buyers to buy more or bigger housing. Low interest
rates can increase the supply of housing since capital sourcing for building them is cheaper.

Check Your Progress

How will an increase in the prices of construction materials increase
housing prices?
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________

In Philippine Context
In the Philippines, large tracts of our forests are reduced due to logging. Logging
activities open spaces for road construction to connect distant places. Gradually,
deforestation gives way to agriculture, too, to feed a growing population. However, as
the population grows, more agricultural land is transformed again to provide housing.
This initiative has an indirect relationship with Philippine agriculture. As more forest
areas are utilized for logging, the agricultural capacity of the country is put at risk even
more. Since the agricultural sector is a primary sector, this can lead to issues in
production and consumption. At the moment, the government is mandating measures
to curb the negative agricultural impacts of logging, including passing laws requiring
high school graduates to plant trees, promoting environmental sustainability

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 7
Price Structure
Unit 3: Application of the Law of Demand and Supply

initiatives, and organizing knowledge-sharing activities for agricultural preservation.

Analysis of the Effects of Land Use Change on Protected Areas in the Philippines
Peter H. Verburg, Koen O. Overmars, Marco G. A. Huigen, Wouter T. de Groot, A.
Veldkamp, “Analysis of the Effects of Land Use Change on Protected Areas in the
Philippines.” Science Direct (Applied Geography, April 1, 2006)
https://doi.org/10.1016/j.apgeog.2005.11.005, last accessed on January 8, 2021.

Wrap-Up
_______________________________________________________________________________________
● Growing economies will cause an influx of skilled workers, which will increase the
demand for houses.
● High prices of construction materials and construction services can push the prices of
houses to increase. This will decrease the supply of houses.
● High prices of basic commodities can push the price of houses to increase.
● Low interest rates can increase the demand for houses. Low interest rates can also
increase the supply of houses.
_______________________________________________________________________________________

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 8
Price Structure
Unit 3: Application of the Law of Demand and Supply

Try This!
A. Identification. Identify the term being described in each statement.

__________________ 1. This is another term used for interest rate in the property market.

__________________ 2. The law that gives the taxing authority to the local government.

__________________ 3. If the quantity demanded of housing is greater than the quantity

supplied, this condition will exist.

__________________ 4. If the quantity demanded of housing is less than the quantity

supplied, this condition will exist.

__________________ 5. If the quantity supplied of housing is equal to the quantity

demanded, this condition will exist.

B. Fill in the Blanks. Fill in the blanks with the correct answer.

1. Houses are considered (a) __________________ goods, while construction materials are
considered (b) __________________ goods.

2. Rising cities will experience __________________ demand for houses.

3. High demand for houses can be caused by a __________________ mortgage rate.

4. Shrinking economies can cause __________________ demand for houses.

5. A housing surplus occurs if the economy is __________________.

6. A housing shortage occurs if the economy is __________________.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 9
Price Structure
Unit 3: Application of the Law of Demand and Supply

7. Lower interest rates can __________________ supply for housing because it lowers the
cost of capital used in providing them.

8. A decrease in property taxes can __________________ the demand for houses.

9. The higher the assessed value of a house, the __________________ its tax.

Challenge Yourself
Short-Response Essay. Write your answer in the space provided.

1. The price of a 55-sqm. floor area in San Pedro, Laguna is priced at Php3.5 million.
Meanwhile in Cabanatuan City, Nueva Ecija, a same-sized space is priced at Php1.6
million. Using the concept of supply and demand, explain the reasons behind the
price difference between the two properties.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________

2. Using the concept of demand and supply, how will landlords set the price of their
apartments if it is located in a central business district?
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 10
Price Structure
Unit 3: Application of the Law of Demand and Supply

Suggested Rubric for Grading

The rubric below is a suggested one. Your teacher may modify the rubrics based on your
needs. Consult your teacher for the final rubric.

Performance Levels

1 2 3 Suggested
Criteria Score
Beginning Proficient Advanced Weight

Proficiency Proficiency

Correct The concepts of The student used Both supply and

supply and demand either the concept of demand concepts
Answer ×2
are not used in the demand (or supply) in were applied in the
analysis. their analysis analysis.

Understanding The student showed a The student showed a The student showed
minimal working an excellent
of Concepts
understanding of the understanding of understanding of
×1
concepts in their different economic different economic
answer. concepts, with some concepts.
errors.

Grammar and The student The student, most of The student

sometimes uses the time, uses consistently used
Spelling
appropriate words. appropriate words in appropriate words in
More than three (3) their explanation. their explanation. No ×1
words are misspelled. About one (1) to three words were
3) words are misspelled.
misspelled.

Total Possible Score 12

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 11
Price Structure
Unit 3: Application of the Law of Demand and Supply

Photo Credit
"Colorful row of houses, blue, green, yellow, orange, blue, green, pink, purple, orange,
yellow, green, blue, black and silver cars, street sign, N 35th and Meridian Ave N,
Seattle, Washington, USA" by Wonderlane is licensed under CC BY 2.0 via Flickr.

Bibliography
Elinder, Mikael, and Lovisa Persson. “House Price Responses to a National Property Tax
Reform.” Journal of Economic Behavior & Organization 144 (December 1, 2017): 18–39.
https://doi.org/10.1016/j.jebo.2017.09.017.

“Real Estate Market - an Overview | ScienceDirect Topics.” Accessed January 1, 2021.

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/real-estate
-market.

Seymour, Eric, K. Arthur Endsley, and Rachel S. Franklin. “Differential Drivers of Rent Burden
in Growing and Shrinking Cities.” Applied Geography 125 (December 1, 2020): 102302.
https://doi.org/10.1016/j.apgeog.2020.102302.

Staff, Investopedia. “How Does Supply and Demand Affect the Housing Market?”
Investopedia. Accessed December 31, 2020.
https://www.investopedia.com/ask/answers/040215/how-does-law-supply-and-demand
-affect-housing-market.asp.

Verburg, Peter H., Koen P. Overmars, Marco G. A. Huigen, Wouter T. de Groot, and A.
Veldkamp. “Analysis of the Effects of Land Use Change on Protected Areas in the
Philippines.” Applied Geography, Are Parks Working? Exploring Human-Environment
Tradeoffs in Protected Area Conservation, 26, no. 2 (April 1, 2006): 153–73.
https://doi.org/10.1016/j.apgeog.2005.11.005

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 12
Price Structure
 Unit 3: Application of the Law of Demand and Supply

3.4. The Impact of Increase of Prices of Basic Commodities

to Housing Shortage, Rent and Housing Price Structure

Let’s Connect
1. If house prices increase, what will happen to the quantity demanded for houses?
Answers may vary. Holding other variables constant, an increase in the price of
housing will decrease the quantity demanded for housing.
2. What are some factors that prevent families from purchasing a house? Name at least
two factors.
Answers may vary. The factors that can prevent families from purchasing houses
are high housing prices, high interest rates, low household income, and the distance
of affordable housing from the place of work or study.
3. Why are we experiencing growth in high-rise and medium-rise condominium
development in the cities?
Answers may vary. The demand for more housing in cities gave rise to the growth
of high-rise and medium-rise condominiums. The land is limited in the city proper, so
the alternative is to build condominiums to satisfy the need for more housing.

Check Your Progress

1. What happens to the supply and demand of housing in cities with growing
economies?
Answers may vary. The demand for housing in cities with growing economies will
increase, creating a shortage of it. The shortage will cause the housing prices to
increase if the housing supply and all other variables are constant. Because of the
resulting high prices, housing developers are motivated to provide more housing,
hence increasing its supply.
2. How will an increase in the prices of construction materials increase housing prices?
Answers may vary. An increase in the prices of construction materials will result in
an increase in housing prices. If the prices of construction materials increase, the
cost of providing housing will increase. Developers will pass the increase in the cost
of construction to buyers, making the prices of houses higher.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 13
Price Structure
 Unit 3: Application of the Law of Demand and Supply
Try This!
A. Identification. Write the correct answer in the space provided.

Mortgage rate 1. This is another term used for interest rate in the property market.

Local Government 2. The law that gives the taxing authority to the local government.
Code of 1991

Shortage 3. If the quantity demanded of housing is greater than the quantity

supplied, this condition will exist.

Surplus 4. If the quantity demanded of housing is less than the quantity

supplied, this condition will exist.

Market equilibrium 5. If the quantity supplied of housing is equal to the quantity

demanded, this condition will exist.

B. Fill in the Blanks. Fill in the blanks with the correct answer.

1. Houses are considered (a) final goods, while construction materials are considered
(b) intermediate goods.

2. Rising cities will experience a high/increased demand for housing.

3. High demand for housing can be caused by a low mortgage rate.

4. Shrinking economies can cause a low/decreased demand for housing.

5. A housing surplus occurs if the economy is weak/shrinking.

6. A housing shortage occurs if the economy is strong/booming.

7. Lower interest rates can increase/raise supply for housing because it lowers the cost
of capital used in providing them.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 14
Price Structure
 Unit 3: Application of the Law of Demand and Supply

8. A decrease in property taxes can increase/raise the demand for houses.

9. The higher the assessed value of a house, the higher its tax.

Challenge Yourself
1. The price of a 55-sqm. floor area in San Pedro, Laguna is priced at Php3.5 million.
Meanwhile in Cabanatuan City, Nueva Ecija, a same-sized space is priced at Php1.6
million. Using the concept of demand and supply, explain the reasons behind the
price difference between the two properties.
Answers may vary. The differences in their housing prices can be connected to the
distance of these two places from the metropolis. San Pedro, Laguna is a more
desirable place to live than Cabanatuan City, Nueva Ecija because the former is
nearer to the National Capital Region than the latter.
Because of this, more people will likely flock to Laguna than to Nueva Ecija. When
many people need housing while housing is limited, it can drive housing prices up.
Meanwhile, in Cabanatuan City, there will be a lower demand for housing since fewer
people may choose to live there. When the demand for housing is lower than the
housing supply, the resulting housing surplus drives housing prices down.
2. Using the concept of demand and supply, how will landlords set the price of their
apartments if it is located in the central business district?
Answers may vary. If the apartment is located in the central business district,
rental prices are expected to be high because of its proximity to common
workplaces. If no other development is occurring in the area and supply is fixed,
landlords will set their price at the highest possible price.

3.4. The Impact of Increase of Prices of Basic Commodities to Housing Shortage, Rent and Housing 15
Price Structure