Emile Salame is the founder of Cornerstone Asset Advisors Ltd, a London-based independent real estate consultancy company that offers an array of specialist services, helping clients to search for and manage real estate investments in London. This article will provide an overview of the different factors that influence the property market, exploring everything from interest rate hikes to changing demographics.
In countries all over the world today, investing in real estate is a popular means of building wealth. In the United States, economic research from the Federal Reserve Bank of St Louis suggests a 65.6% homeownership rate in the first quarter of 2024, with the size and the scale of the property market presenting an enticing and potentially lucrative channel for many investors.
Four key factors impact real estate prices:
- Government policies
- The economy
- Interest rates changes
- Demographics
Legislation can have a significant impact on property demand and prices, with government subsidies, deductions and tax credits all leveraged by policymakers to provide a temporary boost to the housing market. Being aware of current government incentives can help investors determine the potential for future changes in supply and demand, enabling them to spot and avoid following false trends.
The economy is another key factor that affects property values. Generally measured by economic indicators like employment data, manufacturing activity and the GDP, when the economy becomes sluggish the property market tends to follow. The cyclical nature of the economy impacts the real estate industry in a variety of ways. For example, where a real estate investment trust (REIT) incorporates a large percentage of hotels as investments, the REIT would be more volatile during an economic downturn than one that had invested in office buildings. This is due to the fact that hotels in particular are very sensitive to economic conditions due to leasing structures inherent in the business. Office tenants, on the other hand, tend to have longer-term leases that cannot be changed in the middle of an economic downturn.
Interest rates have a significant, direct impact on the real estate market. A homebuyer considering taking out a mortgage to buy a home can use a mortgage calculator to find out how different interest rates will affect the purchase price. In terms of purchasing residential property, interest rate changes directly affect affordability, with a lower interest rate equating to a lower mortgage cost. While this may seem like good news for borrowers, in reality, low interest rates increase demand for real estate, resulting in a rise in property prices. As interest rates increase, the cost of taking out a mortgage increases too, thus lowering buyer demand, triggering a decrease in real estate prices.
Demographics are the data reflecting population composition, weighing up factors like gender, age, race, income, population growth and migration patterns. Major shifts in demographics can impact the real estate market significantly, potentially for several decades. Although these statistics are often overlooked, they can affect the types of properties in demand and how real estate is priced. For example, the retirement of baby boomers has had a substantial impact on the real estate market and is predicted to continue to do so for some time to come.
The real estate market is swayed by a range of different factors that extend beyond government policies. Global events, economic trends and market dynamics collectively shape the landscape of the property market. Understanding that the real estate market is influenced by an interconnected web of factors helps buyers, sellers and investors make better choices. While the real estate market can be unpredictable, awareness of the forces at play enables stakeholders to make informed decisions in rapidly changing circumstances.