Have you ever thought about the reasons for the changes in property prices? In the followoing article, I will cover the main reasons for the property prices´ shifts. This knowledge has been gained from over two decades working as a realtor.
How can one forcast the next price move? How does one determine when it is best to invest? The majority of buyers will keep their eyes on the previous direction of prices. One can say that the expectations of buyers, in fact, get mostly influenced by previous movements. If the prices increased they expect the growth to continue, and vice versa. Unfortunately, this method is not connected to important factors that influence the price, yet it is practiced. When one relies too heavily on such a method, the result may be greatly disappointing, as could be seen not too long ago.
Which economic factors in principle is then responsible for making the price?
- Economic growth
- Nominal interest rates (before inflation) and structure of mortgage products
- Inflation
Let’s look at these factors in more detail.
The stronger the state of economics, the better it is for business not to mention real estate. One of the reasons is that when economics is stronger it raises property prices because the buyer gets reassured that there will be a rise in the demand for housing, including a rise in the value of his property which will enable him to sell it again for a profit. When considering the BIS Quartely Review, it indicates that a 1% rise of GNP is linked with 1% to 4% rise of property price after 3 years.
In order that property prices grow, the first thing needed is eager buyers. One implication of the fact that house lones have to be arranged when anyone wants to buy property, is that there will be many buyers who will go rather for houses with interesting mortgage products that includes low nominal rates. In accordance with the same source, a decrease of just 1% in the nominal interest rate is equal to 1/2% to 1% of property prices increase after 1 year. Buyers are also extremely sensitive to any sort of drop in the nominal interest rate and for this reason property prices settle. But there are exceptions to the rule. For instance - a credit crunch occurs when official interest rates become of less importance and the loan market gets driven by different factors. It concerns the real estate market as well.
Inflation influences changes in the level of interest rates and at the same time the interest rate strongly impacts property prices. When inflation is high it affects each country in a different way. Countries that percieve investing into property as balancing the inflation, will have their property prices increased by higher inflation (for example Germany). These countries are characterized by fixed interest rate loans without equity withdrawal. On the contrary, high inflation has a negative effect on property prices in countries by either floating interest rates like the UK, or fixed interest rates with equity withdrawal, for example the USA.
Rules can not always be strictly applied and numbers and values may not always have any bearing on your disctrict. The realtor has got to see the exceptions and differences. It is, however, important to realize that there exists a general system by which real estate prices are created on the market. Do not be trapped by shallow attitude. It is necessary to take in all aspects connected with the market.
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