The working of a real estate market is not very different from the stock market since both are influenced by more or less the same factors. Changes happening on the economic front, such as inflation, booms, recessions, unemployment, interest rates, and government policies, all affect the market one way or another. Therefore, small changes in any one of the mentioned factors will affect the real estate market either positively or negatively. These variations, in turn, affect the cost of properties, interest and mortgage rates which ultimately disrupts the buying and selling trends of the real estate market.Zameen.com, the country’s premiere realty e-portal has compiled a few factors that will help readers understand the factors that affect realty markets around the world, hopefully helping them make more informed decisions.
Higher economic growth results in better income being earned by the people of a country, allowing them to spend more on commodities. A growing economy will also push up real estate prices. This is why the demand for housing is directly linked to income elasticity, which means that an increase in the average incomes will result in people spending more on houses. The trend changes when a certain place is hit by recession thus leading towards a decrease in income. In such a situation people cannot find enough savings to stash away in assets like real estate.
Directly related to the growth and shrinking of an economy is the employment rate. As is quite obvious, a rise in unemployment will deprive people of the resources necessary to spend on a house or land. But actual unemployment is not the only factor that results in fluctuations in the real estate market. The fear of unemployment also discourages people from investing in the property market since the entire process for them is overshadowed by doubt regarding financial security.
Change in political winds and the health of global economies will influence the real estate market as far as interest rates are concerned. A point in time is last decade’s global recession which affected realty sector in many countries and brought markets crashing down.
Interest rates, in turn, increase the rate of monthly mortgage payments. In a time when interest rates are high, the cost of mortgage payments will also increase, lowering demand in the buying category. Mostly, people prefer to rent out residential spaces when borrowing becomes too expensive.
Consumer confidence in the realty sector of a certain country or a certain city is essential to keep the property buying and selling trends alive. If the market sentiment is if doom and gloom, the average investor will steer clear of investing, resulting in the demand slowing down.
Availability of Mortgage and Loans
When banks have the resources to lend mortgages in large numbers, it allows people the liberty of borrowing in abundance. The ease of getting mortgages, requiring low deposits, results in a rising demand for houses since more people are now able to buy properties of their choice. When banks ultimately decide to raise their lending criteria, borrowing becomes harder, and the demand in realty markets comes down several notches.
To quote one simple international example of how the supply side of this market works, let us take the example of Ireland. During the Irish property boom of 1996-2006, around 700,000 new houses were built all around. Some time later the property market collapsed and what was left behind was an oversupply of residential units. Vacancy rates climbed as high as 15%. In this situation, the supply of units was greater than demand which resulted in the prices falling at a quick pace.
Geographical Factors/Location of Property
All around the world there are places which are highly priced for their strategic locations. Therefore many real estate markets are influenced by geographical positioning. For example, there are areas in London, New York, and other such international cities where prices will remain high even if the adjoining areas face depreciation in property values.
Other than this, properties in commercial hubs or prime residential areas will always hold their value, even if the general market is facing a hard time.