Following the trend
How to determine the next price move? How to determine when is the best time for an investment? What most buyers do is they simply watch for the previous direction of prices. In other words, their expectations are mostly affected by the previous movement. If the prices grew, they expect the growth to continue, and vice versa. Sadly, this method has not much to do with important factors that determine the price. Relying on this method alone can result in very painful experiences, just as we saw not too long ago.
Fundamental economic factors
So what are these significant economic factors that in the end form the price?
- Economic growth
- Nominal interest rates (before inflation) and structure of mortgage products
Let’s look at these factors in more detail.
Strong economics is very important for just about any business out there, and real estate is no exception. One explanation says that strong economics increases property prices by reassuring the buyer that the demand for housing will continue, his property will gain in value and he will be able to pass it on again with profit. According to BIS Quarterly Review, 1% of GNP increase is connected with a 1% to 4% property price rise after 3 years.
Nominal interest rates and structure of mortgage products
For the property prices to grow, you firstly need plenty of eager buyers. While 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 lower nominal interest rates are available. According to the same source, only a 1% decrease in nominal interest rates are connected with 1/2% to 1% property price growth after 1 year. Equally, the buyers seem to be very sensitive to even a slight rise in nominal interest rates, causing the property prices to settle. But beware – no rule works strictly. For example – a credit crunch is a situation wherein official interest rates become less important and the loan market is driven by different factors. The real estate market is likewise affected.
While the level of interest rates has a strong impact on property prices, changes in the inflation rate have a strong influence on interest rates. High inflation has different impacts in different countries.
In those countries, where investing in property is perceived as balancing inflation, higher inflation in fact raises property prices (Germany would be a good example). 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 with either floating interest rates, like the UK, or fixed interest rates with equity withdrawal, for example the USA.
Every rule has an exception, and the numbers and values mentioned don’t have to suit your neighborhood. It’s a realtor’s job to know the exceptions and differences. But you should understand, there is a general system for how real estate prices are created on the market. Don’t be trapped by a shallow attitude. Think about every aspect of the market.
Author Elli Davis welcomes you to visit his real estate website.