Whether you’re a first-time home buyer, expert investor, or considering a career in real estate, understanding what drives property prices is critical to your success.
More than merely a matter of supply and demand, property prices are influenced by a wide range of social, political, and economic factors. As such, while the long-range price trend is positive in the vast majority of markets, the short-term view is significantly more volatile. Add to this wide variety of real estate available in most locations and it’s easy to see why accurate property valuation is such a difficult art to master.
The good news is, you don’t need to be an expert to be in the ballpark when it comes to real estate valuations. By understanding the basics, you should be able to get a good sense of what a property might be worth and whether it’s a good investment at its current price.
The property and its location
The most obvious factor impacting a property’s price is the property itself. Where it’s located, the type of property it is, its size and layout, the quality of fixtures and fittings, and how well it’s maintained and presented will all play a part in determining how much it’s worth. While the features that attract a higher price vary from market to market, there are some things that consistently affect a property’s price, including:
- The quality of local schools has a direct impact on property prices—in fact, a report by the National Bureau of Economic Research found that for every extra dollar (per student) spent on local public schools, house prices increase by $20.
- Proximity to shops, public transportation, and economic centers also attracts a premium.
- Conversely, a location on or near a busy road can put off some buyers and reduce the price.
- Generally speaking, the larger the space (both internal and external), the higher the price.
- Upgraded surfaces and appliances can also help increase the price.
- Most buyers are looking for something they can move into, or rent out, right away, so ‘turnkey properties’ (i.e. ones that do not require renovation) tend to be pricier.
Many sellers are aware of the impact that aesthetics can have on price and prepare their property for sale with this in mind. This presents a range of opportunities for astute investors who can see potential through poor presentation and are able to update a property to maximize the sale price.
The local market and demographics
Buyers will view a property within the context of the broader local market. The effect this has on the price will depend on the quality of the property and its competition. For example, if the property is larger than other houses in the area, or features more upgrades, it should attract a higher price.
The demographics of an area (e.g. average age, household income, population growth, etc.) will also play a role in determining how much a property is worth. Demand for different property types will be dictated by who’s living in the area, which in turn will influence the price of specific properties. Significant changes in regional and national demographics over time can also have an impact on housing values, as we’re now seeing with Baby Boomers driving up prices for smaller homes and properties in popular retirement areas.
With this in mind, when assessing a property’s price, it’s important to look at its comparables (a.k.a. comps). This will give you a snapshot of recent sales activity in the area and a sense of what the market is currently considering a reasonable price. It should also provide insight into the other properties your potential buyers may be viewing, allowing you to better position your property within the local market.
The economy, interest rates, and government policy
At a macro level, a movement in property prices can be tied to a wide range of broader trends. Most significantly, there is a clear correlation between the strength of the economy and the performance of real estate. This means that when GDP and manufacturing activity are up, and the unemployment rate is down, property prices will usually be on the rise.
While data suggests that almost 40% of homeowners are mortgage free, securing financing is still a critical step for most buyers. As such, interest rate changes can have a significant impact on property prices. Lower interest rates mean mortgages are more affordable and easier to get, allowing more people to enter the market and creating extra competition for the available housing stock.
Also, governments often use legislation to stimulate the property market. This is usually done in response to a slowing economy and involves offering additional deductions, subsidies, and tax credits to make investments more attractive or make the market more accessible to new buyers. With this in mind, when buying (or selling), it’s important to consider current government incentives and the impact they are having on demand.
Taking the guesswork out of property prices
While knowing the basic drivers of property prices can help you forecast potential market moves, there is no substitute for real expertise. As such, when you’re looking to buy property, it’s always worthwhile to seek out advice from industry experts. Whether that’s a reputable realtor, a market-savvy mortgage adviser, or a credible conveyancer, any additional insight you can gather will help ensure you’re making the right decision for you.
Also, if you’re an investor, you may want to consider buying outside of your local market. Thinking nationally—or globally—can open up new opportunities and allows you to capitalize on growth in other areas, particularly when property prices in your area are on the decline. However, if this is something you choose to do, seeking out local expertise is especially critical.
Alternatively, you could look to partner with a buyers advocate or other real estate professional that knows the market, but does not have a vested interest in any specific properties. A reputable buyers agent can provide valuable support when it comes to property investing. They will be able to provide you with data on all aspects of the market, including the demographics, preferred property types and locations, and how market performance compares to other major locations. They should also be able to guide your property search and even act on your behalf in sales negotiations.
