The real estate market is influenced by many factors that lead it through various cycles. These are factors that may affect real estate on a national level, but they can also be based in a particular local market. Sometimes the cycles consist of rapid price escalations and at others more consistent price appreciations. Meanwhile, the cycles may be interspersed with periods where prices level off or even drop.
Factors affecting real estate abound, but the key elements affecting residential and commercial properties at various times are demand, supply, socio-economic, government policy, interest rates, and demographics.
“Knowing how to read and understand the driving forces behind the real estate market gives both investors and developers a bigger advantage.” – Nagabhushanam “Bobby” Pedi, CEO TRUiC
Demographics and housing demand
Demographics and income influence the demand for real estate, especially in the housing market. Income, housing prices, and the availability of credit are also determining factors.
Demographics are constantly changing. Shrewd investors watch the data to see where demand is rising. The signs they watch for include family growth which increases the need for bigger housing, or populations looking for smaller homes because of retirement, etc. A new trend is remote workers looking to move away from expensive city centers. Remote workers also demand extra space in the homes they buy or rent to accommodate a home office.
Housing prices affect the demand because the higher they are the less willing people are to commit to a mortgage. Interest rates also determine demand; the lower they are (this is currently the case) the more buyers are interested. In times of employment uncertainty and when there are drastic changes in incomes, the number of buyers on the market decreases.
Banks are usually the facilitators that allow developers and renovators to meet the demand for real estate. Developers require land, materials, and labor. Other expenses include the administrative work and marketing of a development. In a market with low inventory but a big demand, prices increase, and so does development.
Socio-economic factors and the real estate market
Even though economic conditions affect the real estate market, downturns often present opportunities for worthwhile investments. Investors and first-time buyers benefit from the price drops.
Investments in commercial property can also be affected by socioeconomic factors. Downturns may affect investments in hotels, but office leases are generally longer, and more difficult for tenants to cancel.
Hotels can generate income on short-term leases and can be changed into housing, especially if they are positioned in areas where housing is in demand.
Investors also need to be shrewd when choosing mortgages. Typically, the two types of mortgages offer fixed or adjustable interest rates. Adjustable interest rates mean they change according to the monthly lending rate. Mortgages with a fixed interest rate have a shorter lifespan, but rates remain stable throughout the repayment term. Currently, the interest rates are at an all-time low and fixed-interest mortgages make more sense.
Prices and demand due to government policies
Government legislation often encourages investors to make smart moves because they often affect prices and demand. Real estate investors watch for tax credits, subsidies, and deductions. Some incentives offered by the government may not be read properly by investors, and they need to watch for false trends too. In 2009, the government gave a tax incentive to first-time homebuyers. This incentive was only valid for that tax year and was used to kick-start the market at the time.
A negative blow to the real estate market was felt when the U.S. government shut down recently affected 800,000 federal workers. The uncertainty affected housing sales. The aftermath of 2020 remains to be seen, especially its effect on the dislocation of various real estate classes.
Technology and real estate today
Real estate developers and renovators have not ignored the current trend of including technology in their developments. These may only include simple technologies like well-placed routers, plug points in strategic places, and the ability to add smart appliances. Some developers are also building “robot friendly” homes with wooden floors and fewer stairs.
VR allows clients to have an immersive experience from before the property is even built, and digital technologies allow buyers a faster loan application process than ever before.
Real estate continues attracting investors. Everyone needs to rent or buy property, whether to house their family or business. Challenges faced by the real estate market right now include the types of property that will be in demand as the country starts to find the new normal after 2020.
Therefore, investors need to venture forth by making informed decisions. There are various types of real estate investing, and this real estate investment guide takes shows you the best way to start your real estate business.