What factors influence property prices?

Although there is no direct link between real estate and stock market investment, they are often referred to as an extremely attractive alternative to stock market investment. Real estate is also one of the most effective ways to diversify risk in investing money. Even if only for this reason, it is worthwhile to obtain at least basic information on this type of investment.

Real estate as a separate asset class

What is characteristic for real estate is that, as an asset class, they are relatively safe. Moreover, until 2008, most people were convinced that their prices could not fall. Of course, most of them were wrong once again. Real estate is also an asset class that is characterised by the fact that it is subject to inflationary processes. We can therefore be sure that their long-term value will be at least equal to, if not higher than, inflation. Of course, the situation is somewhat different in the short term when there is a risk of change. If the property is purchased for rent, the return on invested capital can be at least six percent. It is a rate comparable to the one we can count on when investing in equity investment funds. And although we are dealing with a rate that varies slightly over time, its value will always be about 6 per cent above inflation. Of course, we can talk about a similar result when investing in shares under dividends, but there is no denying that this is a much more risky solution.

Factors affecting property prices

Those who think about what affects property prices often fear that they are dealing with a complex issue that even economists do not fully understand. In reality, however, we are dealing with macro-economic phenomena which, when we look at them more closely, do not seem to be so difficult to control. At the outset, it should be recalled that when dealing with a free-market economy, both supply and demand are responsible for price formation. The supply is usually defined as the number of houses that are waiting for merchants at a given moment. On the other hand, speaking of demand in this particular industry, we are dealing with the number of people who are at the moment interested in taking possession of real estate. Thus, if supply is greater than demand, a fall in prices is to be expected, and if demand is greater than supply, the natural reaction is an increase in the cost of purchasing a house or flat. Of course, apparent transparency may become more complicated, as we must not forget that both supply and demand are shaped by many factors.

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This issue becomes even more complicated when we realise that there is no shortage of such factors, which at the same time are responsible for both the growth of demand and the growth of supply. Thus, the demand for real estate is increasing, among other things, when unemployment is falling. More people can then afford credit. The drop in interest rates also proves beneficial, as the availability of loans increases with it. Governmental programmes that make it easier for people to take possession of a house or flat also provide valuable support. The increase in demand may also be caused by high rental costs, as it contributes to the fact that it is more profitable to buy one's own home.

Migrations of the population also have a positive impact on the maintenance of demand. Developers, on the other hand, are forced to lower prices when the market starts to deal with the problem of a large number of empty properties. Sometimes it is also helpful to have a kind of fashion for the purchase of real estate, or even a fashion for a given region, which starts to interest people and companies from outside. The growing supply is not only the case when companies themselves are building too much, as the problem may also be the rising interest rates that cause people to have trouble with timely repayment of loans. It is also a problem for people to change their place of residence, which is often linked to changing jobs, and affordable rental costs, which make it appear to be a much more cost-effective solution than paying off a loan.

Of course, when talking about the influence of individual factors on the price of the property, it should also be taken into account that the aforementioned influence is not always the same. It is difficult to determine which one is decisive. However, it cannot be questioned that the general state of the economy is much more important than fashion, especially as the latter has to collapse at some point.

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