What Influences Real Estate Prices?

Have you ever wondered what it really is that can explain the changes in property prices? In this article, I will go throught the main causes for the property prices´ shifts. I am writing from many years of experience as a GTA realtor.

Following the trend

How the next price move can be predicted? How does one determine when it is best to invest? Most buyers simply watch for the previous direction of prices. In other words, their expectations are mostly affected by the previous movement. Once prices grow, it will be their expectation to see such growth continue, as well as the other way round. Unfortunately, this method has no bearing on 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.

Primary economic factors

Which economic factors in principle is then responsible for creating the price?
- Economic growth
- Nominal interest rates (before inflation) and structure of mortgage products
- Inflation
Let’s look at these factors in more detail.

Economic growth

Strong economics will have a good influence on business every where and real estate is no exception to this. 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. The BIS Quartely Review states that for every 1% increase of GNP, a 1% to 4% increase of property price can be expected in the up-coming 3 years.

Nominal interest rates and structure of mortgage products

For the property prices to grow you firstly need plenty of eager buyers. Since today almost nobody can afford to buy property without some kind of a house loan, there are more buyers eager to buy houses when more attractive mortgage products with a lower nominal interest rates are available. According to the same source, only 1% decrease in nominal interest rate are connected with 1/2% to 1% of property prices growth 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. Watch out – no rule works strictly. For example – credit crunch is a situation, when official interest rates become less important and the loan market is driven by different factors. It works the same with the real estate market.

Inflation

Inflation influences changes in the level of interest rates while the interest rate strongly impacts property prices. When inflation is high it affects each country in a different way. Countries that consider investing into property as balancing the inflation, will have their property prices increased by higher inflation (for example Germany). A typical characteristic of these type of countries is the fixed interest rate loans without any equity withdrawal. Some countries see the negative implications of high inflation on property prices such as in UK where the interest rates float and in the USA that has interest rates with equity withdrawal.

Conclusion

As with most rules there are exceptions and numbers and values do not always have to apply to your area. It’s realtor’s job to know the exceptions and differences. Altough} you should understand, there is a general system how the real estate prices are created on the market. Don't let shallow attitude get thebest of you. Think about each aspect of the market.