NUST Business School

Fundamentals of Econometrics (ECO-213)

Construction & Real Estate Industry of Pakistan

Submitted to:
Dr. Shujahat Haider Hashmi
Submitted by:
Mahad Azam
Reg No. 457609

BSTHM 23

Date: 10th of September 2023.

TASK 1: Ten Principle of Economics in The Construction & Real Estate Industry of Pakistan
1. People Face Trade-Offs: In the case of the construction and real estate industry, one of the biggest
trade-offs they must face is between location and price. To buy a property at a prime location they
have to pay more. Similarly, they can pay less for a lower standard location.
2. The Cost of Something is What You Give Up to Get It: A developer\contractor may have to decide
between constructing a residential complex or a shopping mall on a piece of land. The cost of
choosing one of them would mean losing the revenue from the other.
3. Rational People Think at The Margin: A rational homebuyer considers whether to purchase a
house with an extra bedroom. He weighs the marginal benefits of the extra space to the marginal cost
of the higher price.
4. People Respond to Incentives: The government may provide real estate agents and brokers with
commission as incentives for helping buyers and sellers complete property transactions. The
commission can influence the brokers and agents’ behavior and motivate them to close other deals.
5. Trade Can Make Everyone Better Off: International real estate investors can buy property in
Pakistan which will benefit them as well as the local economy by bringing in foreign capital.
6. Markets Are Usually a Good Way to Organize Economic Activity: Investors can rely on the real
estate market to allocate their investments efficiently. They assess market conditions, such as rents
and property appreciation potential to make profitable decisions.
7. Government Can Sometimes Improve Maret Outcomes: The government regulates building
safety standards in construction projects. This improves market outcomes by ensuring safe and
secure construction.
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods & Services: The
construction and real estate sector contributes significantly to a country’s GDP and standard of
living. It provides commercial spaces, infrastructure and housing.
9. Prices Rise When Government Prints Too Much Money: An increase in the money supply
without a corresponding increase in the supply of real estate can lead to inflation in property prices,
making housing less affordable.
10. Society Faces a Short-Run Trade-Off Between Inflation & Unemployment: The government
may implement policies to decrease inflation but that impact the construction company’s growth and
employment, as higher interest rates can decrease the number of investors.
TASK 2: Determinants of Demand & Supply in the Construction & Real Estate Industry of Pakistan
Determinants of demand and supply in the construction and real estate industry of Pakistan may vary over
time due to different political, social and economic conditions. The following are some determinants that are
affecting and may affect the industry in the future:

Determinants of Demand
1. Population Growth: Increase in global population, especially in the urban areas of Pakistan has
increased the demand for residential and commercial properties.
2. Urbanization: As more people shift from rural to urban areas, the demand for housing and business
infrastructure increases.
3. Economic Conditions: Economic factors such as employment, inflation and income also affect the
demand of real estate and construction industry. As of the current situation of Pakistan, due to high
interest rates and inflation the demand for real estate has gone down.
4. Government Policies: Government initiatives such as the Naya Pakistan Housing Scheme,
incentives and low-cost housing increase the demand for real estate and housing by making home
ownership more accessible.
5. Consumer Confidence: Consumer confidence plays a crucial role in the real estate industry of
Pakistan. Despite the current economic situation, the consumers do not feel safe investing in the
industry, which has resulted in a decrease in demand.

Determinants of Supply
1. Availability of Land: Availability of land, especially in urban areas, is a critical component which
defines the supply. Limited availability of land can restrict the supply of properties and results in a
rise of property prices.
2. Construction Costs: Fluctuations in the price of construction materials and labor cost can severely
restrict the supply of property. High costs discourage developers from initiating new projects.
 3. Government Regulations: Permits, building codes and zoning laws can greatly affect the supply of
property. Streamlined and monotonous regulations encourage builders to initiate new projects, while
complex regulations restrict development.
4. Market Competition: Healthy competition among developers can lead to an increase in supply as
they strive to capture market share and meet the demands of buyers and investors.
5. Economic Growth: Strong economic growth can result in increased business activity, leading to a
higher demand for commercial real estate, including office spaces, industrial properties, and retail
spaces.

The determinants of both demand and supply vary with several factors. These may include government
policies, environmental factors, national and international economic conditions and many others. The given
factors are affecting and may affect the market in the coming future.
Demand And Supply Analysis of Change in Market Equilibrium

Equilibrium Point

Consider the above given graph (hypothetical) of the demand and supply of land in rural areas during certain
conditions (unspecified). The demand and supply have been clearly highlighted.
When demand equals supply, market equilibrium is achieved. In the above given graph, the point labeled ‘X’
is the equilibrium point where the demand and supply are 50 at the price of Rs50,000.
In case of any change of conditions, for instance, pollution in urban areas. The demand for rural property
will increase, resulting in a possible increase in supply of rural land.

The increase in demand for rural land resulted in an increase in the supply of it too. This caused the market
equilibrium point to shift to a higher level where the demand and supply is 60 at Rs50,000.
This method may not be the same for all conditions as the demand and supply may or may not increase
depending on the circumstances.
As mentioned above there are a number of factors which affect the demand and supply of the industry. These
fluctuations in demand and supply cause a change in market equilibrium. When market equilibrium changes
it means that the price and quantity of a good has changed. The following are the possibilities that occur
when market equilibrium shifts:
- Increase in supply leads to lower prices and higher quantity.
- Decrease in supply leads to higher prices and lower quantity.
- Increase in demand leads to higher prices and higher quantity.
- Decrease in demand leads to lower prices and lower quantity.
Changes in market equilibrium have a significant impact on the consumer and producer. For consumers,
higher prices lead to a decrease in purchasing power. And in the case of producers, higher prices lead to
increased profits.