Real estate companies purchase, sell and rent out commercial and residential properties. They also offer property management services (Pettinger, 2013). In the past few years, the real estate industry has grown exponentially due to increase in demand for accommodation. Investors in the real estate sector can invest their financial resources directly by building and selling houses.
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Alternatively, they can invest their capital indirectly through real estate asset companies (Pettinger, 2013). Today, many investors are interested in the real estate sector because it has lucrative returns. However, some investors make irreparable loses due to lack of market information and poor planning. House prices have been volatile due to market forces. This study discusses the main factors that determine house prices.
Economic growth is one of the key determinants of house prices. For instance, when people earn sufficient income, they tend to invest in houses (Nguyen, 2014). Increase income leads to high demand for houses; hence, leading to increase in house prices. Conversely, a serious economic decline lowers house prices because it leads to low purchasing power. During economic recession, many homebuyers often fail to repay mortgages on time; hence, their houses are repossessed and sold cheaply (Golob & Bastic, 2012).
Decline in employment opportunities leads economic decline and low purchasing power (Pettinger, 2013). This situation leads to decline in house prices. The fear of redundancy also disheartens many homebuyers from taking mortgages. For example, during the 2007 economic recession in the US, many people never wanted to buy homes on credit because they feared losing their jobs.
High interest rates make mortgages expensive. This leads to low demand for houses. For example, when interest rates are high, many individuals prefer renting to buying houses. Furthermore, interest rates affect house prices significantly, if many homebuyers have high variable loans. For instance, house prices plummeted considerably between 1990 and 1992 in the UK because high interest rates made mortgages expensive (Pettinger, 2013).
There is an intricate relationship between availability of mortgages and house prices. For instance, when many financial institutions lend mortgages, property prices ascend drastically due to increase in purchasing power. However, during economic recession, many homebuyers avoid taking mortgages even if they are affordable (Pettinger, 2013).
To some extent, consumer confidence is a key determinant of house prices. For instance, if consumers predict that house prices will fall in the near future, they will defer purchasing (Pettinger, 2013).
Geographical factors determine house prices in many ways. Houses near social amenities like shopping malls, good learning institutions, hospitals and transport facilities are normally expensive because they are highly demanded. Those near natural features, such as beaches, lakes and game parks are expensive because they attract many buyers. Moreover, houses in properly planned areas attract high-end consumers; hence, they are expensive (Pettinger, 2013). On the other hand, houses in underdeveloped areas are cheap due to inadequate social amenities and insecurity. For instance, the proximity of a beautiful house to a slum can affect its price negatively because many buyers feel insecure in remote and overcrowded places (Golob & Bastic, 2012).
Population increase in urban areas often leads to high demand for housing. Thus, there is a correlation between population increase and house prices. On the other hand, population decrease lowers house prices due to low demand. For instance, a natural calamity can trigger mass movement of people from the affected area; hence, leading to a drastic decrease of house prices (Nguyen, 2014).
Major changes in demographic characteristics of a country can significantly affect house prices for many years. For example, a country with an aging population may create demand for second homes in well-liked holiday areas as many people begin to retire (Nguyen, 2014).
Some government policies can influence property prices. For example, tax credits and subsidies are some of the mechanisms through which the government can increase demand for houses. In the US, the government implemented a first-time homebuyers’ tax credit to its citizens with an aim of boosting home purchases in a slow-moving economy. “The National Association of Realtors, points out that this tax inducement encouraged 900,000 Americans to buy homes” (Nguyen, 2014).
Last, property prices in the real estate sector are determined by the cost of construction. For example, an increase in the cost of construction materials, such as timber, iron and cement greatly influence the cost of real estate products. Moreover, the size and quality of fittings installed in a house greatly influence its price.
This essay has revealed various factors that determine house prices in the real estate industry. Therefore, investors should take them into consideration when developing various housing products. Due to the volatility of the real estate sector, investors should carry out market research regularly in order to meet the expectations of consumers. In addition, investors in real estate should develop affordable housing products because majority of house buyers are middle-income earners. On the other hand, house buyers should scrutinize house prices keenly before investing in house. Home buyers should also avoid expensive mortgages with stringent repayment terms.
Golob, K., & Bastic, M. (2012). Analysis of impact factors on the real estate market. Web.
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Nguyen, J. (2014). Key factors that drive the real estate market. Web.
Pettinger, T. (2013). Factors that affect the housing market. Web.