The real estate sector happens to be one of the most unpredictable markets. It is affected by a number of market factors and represents a major proportion of people’s wealth. The amount of profit and the time period in which it can be attained, make it an attractive and lucrative option for many investors. However, due to the high level of risk and stake involved, it is imperative to invest your resources after analyzing all the pros and cons of the market.
As a matter of fact, a shift in the demographics of a nation (changes in the composition of population, such as age, race, gender, income, migration patterns and population growth) is likely to have a significant impact on real estate trends. There are a number of ways this type of demographic shift can affect the real estate market. Some of the major factors that have a significant impact on real estate include:
Rate of Interest
The real estate market is greatly impacted by the rate of interest. It is recommended to research interest rates using a mortgage calculator, for anyone looking forward to buy a home with a mortgage. Any change in the interest rates directly determines a person’s ability to purchase a residential property. It has been observed that there exists a direct relationship between the interest rates and the cost to obtain a mortgage. As a matter of fact, the decrease in the interest rates reduces the cost to obtain a mortgage to buy a home. Consequently, this creates a higher demand for real estate and increases the prices. Thus, with the increase in interest rates, the cost to obtain a mortgage increases, which lowers the demand and prices of real estate. In the same way, with the cutting down of interest rate, the Real Estate Investment Trust (REIT’s) high yields become more attractive and their value goes up.
The overall economic health is yet another important factor, which affects the value of the real estate. There are a number of indicators such as the GDP, employment data, manufacturing activity, the prices of goods, etc, which reflect the overall health of an economy. It is important to note that a sluggish economy leads to stagnancy in the real estate. Though, the cyclicality of the economy can have different effects depending upon the types of real estate. For instance, an economic recession is more likely to affect a REIT having a larger percentage of its investments in hotels, as compared to a REIT that had invested in office buildings.
Government Policies or Subsidies
The demand and prices of property are also impacted by the policies made by the government. The tax credits, deductions and subsidies are the most common ways in which a government can increase the demand for real estate. Thus, it is important to know about the current government incentives for ascertaining the changes in supply and demand, and figuring out the potentially false trends.
For instance, in order to increase the home sales in a stagnant economy, a first-time homebuyer’s tax credit was introduced by the US government in the year 2009. As per the National Association of Realtors (NAR), this tax incentive led to a substantial increase in the sales with over 900,000 people buying houses.
Certainly, having a complete understanding of the key factors that drive the real estate market can help you in making the best investment decisions. It is also important for carrying out a complete analysis of potential investment options.