Real estate is an essential asset for investors, as its value generally appreciates over time. Those who can afford to be part of the property market tend to do so due to consistent income, tax benefits, wealth diversification, and the possibility of leveraging more wealth through it. Property prices vary based on available supply. When there is a rise in demand but limited supply, property prices increase, and rents are higher.
What are the factors driving the real estate market?
The rise and dip of real estate demand varies as per government policies, such as tax benefits, deductions, subsidies, etc. Also, interest rates can affect the demand – lower interest rates and mortgage rates lead to more buyers. But these also lead to a hike in property prices.
Here are the main factors influencing property prices:
- Interest rates and mortgage availability
Higher interest rates mean higher monthly payments, which lead to lower demand for property purchases. This, in turn, makes renting seem more attractive. Interest rates have a greater impact when borrowers have variable mortgages. When there is a boom, banks are interested in offering more mortgage options, which tempts potential buyers into taking higher-risk investments. However, since the recession, banks have tightened their grip on lending and affected mortgage availability and demand.
- Economy
The general state of the economy has a significant impact on the real estate market. If economic factors like GDP, manufacturing, rates of goods, employment data, etc., are sluggish, the real estate segment will perform accordingly. When there is higher growth in income, buyers can spend more, thus leading to more demand and more purchases. This will, in turn, lead to a hike in property prices. On a similar note, when unemployment increases, the property market falls as people do not have the income to set aside for property investments.
- Government regulations and policies
Government incentives can be a good indicator of property market trends and changes in supply and demand. When the government offers more tax benefits and subsidies, it is a boost for the real estate market as these are motivations to potential buyers.
- Demographics
The demographics of an area – population, age, gender, and income – have a huge impact on trends in the real estate market. For example, will the demand for second homes decrease when people retire? If the income and family sizes are small, they will require smaller homes.
When does real estate suffer the most?
A recession or a weak economy is the biggest threat to property purchases and investments. When people lose jobs and income, it affects their ability to pay mortgages.
Also, another factor that affects the real estate market is inflation. Property prices increase. Construction costs increase, but it would have fewer takers, which in turn affects supply.
When potential buyers don’t have confidence in property prices, that can also affect the market. For example, if they fear property prices can dip, they will defer buying to a more favourable time.