Factors That Influence Real Estate Prices

Real estate prices never cease to amaze. The real estate market, as anyone who watches it for any reasonable period of time comes to realize, is one that is characterized by almost predictable cycles of ‘booms’ and ‘busts.’ The former are the periods when prices in the market soar. And almost inevitably, they are followed by other periods when the prices plummet. There are actually people who make a living out of these cycles! These are people whose study of the property markets has brought them to a point where they can reliably tell when they are seeing a ‘bust’ (when the prices are ultra low), purchase property as that point – and then offload it during the subsequent and virtually inevitable boom, making a killing.

Prices in most other areas are influenced by demand and supply forces. But for some reason, the real estate market prices seem to be dictated what comes across as quite a different set of forces.

In actual fact, though, the seemingly perpetually wavering property prices are still under the control of demand and supply forces. Busts occur when there is an ‘over supply’ of real estate, compared to the effective demand at those periods of time, whereas booms occur where demand outstrips supply. But as it turns out, these demand and supply dynamics of the real estate market will in turn tend to be under the influence of other deeper factors; so that the demand and supply dynamics we observe are in fact manifestations of other deep-lying factors.

Those other deeper factors that influence property prices can be classified into three categories, for the sake of analysis. They are political factors, purely economic factors and social factors. They are pretty much obvious things. The only problem is that when most of us are thinking about real estate prices (and the demand and supply dynamics in them), we tend to imagine that the ‘demand and supply’ movements are just there, sort of in isolation – as if they have no cause. Yet as mentioned earlier these demand and supply movements are in actual fact manifestations of these other deeper factors. And an understanding of these other political, economic and social factors that affect demand and supply of real estate can help you be able to make better predictions about the property markets; which, as we have seen earlier, can help you make a fortune.

Now attempting to explain what can be termed as a political factor, what can be termed as an economic factor and what can be termed as a social factor might be too involving for our limited scope. But through examples, this distinction can be quite clearly made.

Starting with the political factors that can affect property prices, we would be looking at something like the government that gets put in power (as different governments have different policies on real estate). Something like the approach of elections, and the uncertainty such periods tend to come with can cause a bust; as people want to see the results, before deciding whether to buy more real estate or not.

In terms of economic factors, we are looking at something like availability of easy credit (which can cause a boom, as people, armed with money, start chasing the few real estate holdings that may be available for sale at that time). We are also looking at something like improved economic performance, which often puts more money into people’s pockets, with many deciding to invest in real estate; which effectively raises demand, and subsequently raises prices.

Socially, we are looking at something like population growth (which, when combined with some money in the people’s pockets, often translates to increased demand for real estate, ultimately leading a boom). We are also looking at something like a rise in crime rate in a given area, which can make people be wary of living there, translating to a ‘fallen demand’ and hence a bust.

What is important to keep in mind in all these things is that they are always in a state of flux. For that reason, you shouldn’t expect prevailing conditions to hold forever, which is a mistake many people make when making decisions to buy or sell real estate.

Factors That Influence Real Estate Prices