Have you ever wondered what it really is that can explain the changes in property prices? In the next article, I will try explain the main factors behind the property prices’ shifts. I am writing from many years of experience as a Toronto realtor.
Watching the trend
How to determine the next price move? How to determine when is the most appropriate time for an investment? The majority of buyers will keep their eyes on the previous direction of prices. To say it differently, what buyers expect is mostly affected by previous movement. Should prices go up, they will expect a similar growth to go on, and visa versa. Sadly, this method has not much in common with important factors that determine the price, but yet it is often practiced. Relying on this method alone can result in very painful experiences, just as we saw 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 impact on business every where and real estate is no exception to this. One reason is that strong economics will positively increase the prices of property as it reassures buyers that the demand for housing will keep on growing, their property will increase in value and they will be able to make profit when passing it on again. 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 following 3 years.
Nominal interest rates and structure of mortgage products
For the property prices to grow you firstly need plenty of 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. According to the mentioned source, a 1% drop in the nominal interest rate can be linked with 1/2% to 1% rise in property prices after 1 year. Similarly, buyers get easily influenced by the smallest increase in the nominal interest rate which in reaction causes a settling of property prices. 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
Property prices are strongly influenced by the rate of interest while changes in interest rates are influced by inflation. When inflation is high it affects every country in a different way. Countries that see investing into property as balancing the inflation, will have their property prices increased by higher inflation (for example Germany). Such countries may be characterized with fixed interest rate loans with no equity withdrawal. On the other hand, 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.
Conclusion
Every rule has an exception and numbers and values mentioned don’t have to suit your neighborhood. 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. Don’t let shallow attitude get thebetter of you. Think about every aspect of the market.