Four Key Factors that Affect the Real Estate Market
The real estate industry is the world’s most important asset class, with a value totaling $228 billion according to HBC Holdings plc. More and more people have put their money into owning commercial or residential real estate, in the hopes of attaining physical security for the present and financial security for the future. This massive, growing industry is therefore forever changing around certain factors like:
- Demographics – statistical data relating to the population and particular groups within it.
- Economy – an area of the production, distribution and trade, as well as consumption of goods and services by different agents.
- Interest Rates – the amount a lender charges for the use of assets expressed as a percentage of the principal.
- Government Policies & Subsidies – a plan or course of action, as of a government, political party, or business, intended to influence and determine decisions, actions, and other matters
The first factor I want to discuss today is demographics. Demographics describe the composition of a certain population and can explain, in many ways, price changes within the real estate industry. Age, race, gender, income, and migration patterns all play a key roll in explaining certain trends in the economy. For example, in Mexico, there are many inter-generational families that live together under the same roof. This requires more spacious, expensive homes that could drive up property values.
Rapid changes in demographics can also contribute to changing the real estate market. One great example is India. Having gained its independence in 1947, the Indian population exploded meaning many of the Indian children born during that time are now retiring; driving home values through the roof. This trend is expected to continue for the next decade, while the remaining people born between the years 1945-1965 finish their careers.
The next factor that greatly effects the real estate industry is the economy. Unfortunately, many people fail to understand basic economic principles and cannot take the time to teach themselves how to analyze things like GDP, unemployment rates, or inflation. These data points allow you to understand whether or not the economy is growing, contracting, or stagnant and give you the opportunity to calculate your likelihood of success in any investments.
It really is very simple to understand. If the economy is expanding, it is more likely a good time to invest. If the economy is contracting, it is a better time to save your money. The economy fluctuates on a day-to-day basis in turn changing the real estate industry. How are you supposed to know when it’s the right time to invest if you aren’t taking the time to learn how to breakdown economic and financial data.
Interest rates are defined as the amount lenders charge for the use of an asset, such as a loan or mortgage. Assets are essential in the real estate industry due to the fact that most people cannot afford to purchase a house in full. If interest rates are higher, a borrower has to pay back a larger percent of the principle cost; if rates are lower, the lender receives a smaller percentage of the principle.
There are many different ways in which higher or lower interest rates can affect the real estate industry. For example, if interest rates are higher, people will either have to pay a higher monthly payment or spread their payments out over a longer period of time. This can turn buyers off to the idea of purchasing a new home for many reasons. Maybe they want a house they can pay off earlier in order to use it as a rental property or want a lower monthly payment to keep up with other bills. Whatever the reason, understanding interest rates and how they work is essential in the home buying process as well as the home selling process.
Another interesting thing to note on interest rates is that some kinds of properties are not affected by changing rates. The best example would be long term leases on office buildings. Because these kinds of leases can spread out over decades, lenders apply fixed interest rates so that the investment is reasonable. If the interest rates weren’t fixed the level of risk investing in a long term lease would be so high no person in their right mind would go ahead with it. This risk comes from volatility in the economy and government spread out over time. There is no way to tell if interest rates are going to triple in the next 50 years, so you might be able to afford your payments now, but in the future you won’t.
The last key factor I want to discuss today is government policies and subsidies. Government policy can be defined as a plan or course of action, as of a government, political party, or business, intended to influence and determine decisions, actions, and other matters. This can come in the form of tax policy, immigration policy, foreign policy, or many others. It is extremely, extremely important to pay close attention to government policy because it greatly impacts all industries from real estate to professional sports. Governments can put policies in place that help business owners through things like lowering their taxes or hurt owners by reducing the number of illegal immigrants in the construction industry, making wages go up. No matter what you believe is good or bad policy, it is vitally important to pay attention.
Subsidies are are financial grants extended by the government to private institutions or other public entities, in order to stimulate economic activity or promote activities that are in the public good. Government subsidies can come in many different forms. From subsidies for farmers growing rice to send overseas to Haiti to tax breaks for large corporations making athletic clothing, these grants are used to create movement within the marketplace. These subsidies can drastically change the way in which you want to approach the real estate industry. One example is tax cuts for investing in opportunity zones. Currently there are opportunity zones all around the United States, in which if you invest money you will receive certain tax deductions.
Ultimately, you need to have a keen awareness on these factors to make the best decisions. Hopefully this blog gives you some good insight on what factors I believe are constantly affecting the real estate industry and some examples of how they could impact your business. If you’re ever interested in learning more on the industry as a whole please feel free to get in touch through one of my social media platforms.