How Real Estate Prices Can Be Understood

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Have you ever considered what it really is that can explain the changes in property prices? In the following article, I will try explain the main factors behind the property prices’ shifts. How do I know this information? Because I have been a realtor in Toronto for over 25 years.

Keeping an eye on the trend

How to determine the next price move? How does one know it is the right time to invest? Most buyers just watch for the previous direction of prices. To say it differently, what buyers expect is mostly affected by previous movement. If the prices rise they expect the growth to continue, and vice versa. Unfortunately, this method is not connected to important factors that influence the price, yet it is practiced. Relying on this method alone can result in very painful experiences, just as we saw not too long ago.

Primary economic factors

What economic factors have the most significant effect on how prices are formed?
– Economic growth
– Nominal interest rates (before inflation) and structure of mortgage products
– Inflation
Let’s look at these factors in more detail.

Economic growth

The stronger the state of economics, the better it is for business as well as for real estate. One of the explanation says that strong economics increases the property prices by reassuring the buyer that the demand for housing will continue, his property will gain in value and he will be able to pass it on again with profit. Regarding the BIS Quarterly Review, 1% of GNP increase is connected with 1% to 4% property price rise after 3 years.

Nominal interest rates and structure of mortgage products

In order that property prices grow, the main thing needed is eager buyers. As a result of the fact that many people can not buy a property without some sort of house lone, most buyers are eager to instead buy houses when there are attractive mortgage products with low nominal interest rates. According to the refered source, a 1% drop in the nominal interest rate can be linked with 1/2% to 1% rise in property prices after 1 year. Equally, the buyers seem to be very sensitive to even a slight rise of nominal interest rates, causing the property prices to settle. Be careful – no rule works strictly. For example – credit crunch is a situation, when official interest rates become less important and the loan market is driven by different factors. So is the real estate market.

Inflation

While the level of interest rates has such a strong impact on the property prices, the changes in the inflation rate have a strong influence in changes of interest rates. Countries get influenced in different ways by high inflation. In some countries, where investing in property is perceived as balancing the inflation, higher inflation in fact rises the property prices (Germany would be a good example). A typical characteristic of these type of countries is the fixed interest rate loans without any equity withdrawal. Some countries see the negative effects of high inflation on property prices such as in UK where the interest rates float and in the USA that has interest rates with equity withdrawal.

Conclusion

Rules can not always be strictly applied and numbers and values may not always have any bearing on your disctrict. It’s realtor’s job to know the exceptions and differences. Altough you should understand, there is a general system how the real estate prices are created on the market. Don't let shallow attitude get thebest of you. Consider all that is part of the market.


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