The bank may not lend him money and cannot buy even if he wants to. We see, therefore, that banks are responsible for housing prices, too. B) The conditions that set in the mortgages: Many potential homebuyers are set, more than in the price of housing, on the mortgage fee that will come out.
Theorize about the formation of housing prices in the free market
The price of a home is marked, in economic theory, at the point where the housing claimants and the bidders agree. Simplifying in the extreme, we will say that if Antonio wants to sell his house for € 300,000 and Paco buy it for € 200,000 and, after negotiating, they agree and the sale is made for € 250,000, this is the price where the offer is crossed and demand. So far nothing weird. But.
But is not so exactly
In the formation of real estate prices of medium-low-priced homes (and often also in those with high purchasing power), in which buyers have hardly any money saved and depend on bank financing, two other agents come into play more on the supply and demand graph:
1.- Banks and savings banks.
2.- Appraisal companies.
1.-Banks impose two types of restrictions on the maximum value that a home can reach:
A) Their risk criteria to analyze whether or not a customer can buy a home: For example, if they require that both owners are fixed in their work, they would expel all storms from the market. Or, as is the case now, if construction workers and similar workers are not financed, they suddenly eliminate this group from the housing demand graph.
In economic theory we would say that they modify the demand graph, reducing it (and thus reducing the equilibrium price of housing). If Paco is willing to pay € 250,000 for the house but works as a technician in a work, the bank may not lend him money and cannot buy even if he wants to. We see, therefore, that banks are responsible for housing prices, too. B) The conditions that set in the mortgages: Many potential homebuyers are set, more than in the price of housing, on the mortgage fee that will come out. This is the key.
The fee limits the price increase
We could say that mortgage conditions limit the maximum price at which buyers can bid on the free housing market. The three basic figures are: Interest rates: A buyer may access the home he wants if the resulting fee is calculated at Euribor + 0.18 (today 5.502%) but not at Euribor + 1 (6.322%). This condition affects the fee (maximum price you can pay).
Paco would pay € 250,000, but his payroll is not enough to pay a fee of € 1,432 (at 6,322%), although he could pay € 1,289 (5,502%).