Before talking about the factors that affect the real estate markets, let’s talk about what Real Estate actually is.
Real estate is a form of real property, meaning that it is something you own that is attached to a piece of land. It can be used for residential, commercial or industrial purposes, and typically includes any resources on the land such as water or minerals. It is considered one of the best investments all over the world.
Coming back to our main topic which is “Factors affecting the real estate markets”. The real estate market is all properties available for sale or rent in a given area.
There are a number of forces in a given area that can cause an increase (or a decrease) in the demand and supply of properties.
In our opinion, the key factors that affect the real estate market are:
1. Political Stability,
2. Economic Growth & Stability,
3. Interest Rates
Political stability is important for any country. It is important for every investor to know the future of politics; The upcoming leader or party that will be ruling or governing the country. It is important for a party or the elected government to finish their tenure of 5 years in order to create stability in the country. This grows confidence in investors to invest in different markets as well as the real estate market. Lack of this confidence can cause the investors to hold off on their business and investment decisions, and can cause a feeling of unease that leads to a lot of investors moving their funds outside of the country to other safe havens. For example, a lot of wealthy Pakistanis choose to invest money in Dubai Real Estate compared to Pakistani market leading to a reduction in demand for local Real Estate.
Economic condition and Economic stability are of utmost importance – if the country offers good economic stability and avenues for economic growth, the country will have high GDP, high employment rate, high job security, low crime rate and high purchasing power. Therefore, people will be able to afford investing in quality real estate thus increasing the demand and prices of real estate. This also leads to a lot of foreign investment into the country, and helps to support the exchange rate.
All of this helps to give confidence to future builders to keep investing in real estate projects and therefore leads to more and more jobs being created, and helps to further reinforce the good economic state of the country.
Reverse is also true. When the country is struggling and is not doing well economically. The future economic activity can come to a standstill as all market participants – investors, construction companies, planning authorities – decide to wait and watch till things improve. Real Estate usually struggles during this time as people are afraid to invest in struggling economies.
It is safe to conclude that a healthy and stable economy is the starting foundation for a healthy real estate market.
Interest rates also have a major impact on the real estate markets.
Interest rates represents the cost of borrowing money. If the interest rates are high, it is expensive to borrow money and therefore it becomes unaffordable for many to buy real estate. This leads to a decline in demand and thus prices fall as a result.
When the rates are high, it is also more expensive for construction companies and builders to invest in new projects, and this leads to decline in supply of real estate. However, this effect is lagged and we don’t see the supply fall as quickly as the demand falls. This leads to more pressure on the prices to fall due to declined demand.
On the contrary, when the interest rates fall – the borrowing costs fall and we see more and more people taking out a mortgage to buy real estate. Taking out a mortgage is simply taking out a real estate loan. Changes in interest rates can greatly influence a person’s ability to purchase real estate. When the rates fall, construction and development activity also improves and leads to an increase in supply of properties and projects available. Demand response is always instant, whereas the supply response usually lags (project approvals and funding takes times!), and therefore we see prices going up during periods of lower interest rates.
We can make the following conclusion:
1-Political Stability – Real Estate Market improves & Prices go up
2-Economic Growth & Stability – Real Estate Market improves & Prices go up
3-Lower Interest Rates (cheaper to borrow money) – Real Estate Market improves & Prices go up
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