There has been tremendous growth in the real estate industry over the past decade. This can be attributed to the fact that property appreciates. Several forces can affect pricing in the real estate market. Apparently, some of the factors are beyond control thus hard to plan for. Here are some of them.
Capital growth rate
Property prices are expected to rise with the increase in household income and vice versa. Property dealers working with nominal growth are more negatively affected compared to those working with inflation-adjusted capital growth since the latter can be tardy and average.
Capital gains tax
Imposition of capital gains tax by government increases government revenue but lowers the return on investment. Investors and entrepreneurs are subsequently affected in both monetary and psychological terms. This effect eventually reduces capital reallocation and creates undersupply by hampering the available stock.
Since foreign buyers can only buy new properties, yet these new properties are few, their prices increase with this increased demand and reduced supply.
As a matter of fact, certain areas have urbanized faster than others. This variation in development is perhaps as a result of people migrating there in search for more comfortable amenities. Thus, property developers factor in their pricing this potential increase in the demand for houses.
Since investors are diverse and with distinct preferences in the way they operate, some look for cash flow through positive gearing while others do that through negative gearing. Negative gearing increases demand by manipulating demand-supply dynamics, thus raising prices.
Rental vacancy rates
When investment properties remain vacant for extended periods of time, rental returns are affected. The inseparable relationship between rental returns and capital growth means that prices will be affected by this effect in rental yields.
Land use restrictions have a significant impact on land value and eventually on the value of properties developed on that land. There are certain times when the government restricts an area from engaging residential development while other times, the same government may only allow apartments and dwellings in certain areas, limiting commercial developments on the land. These restrictions indirectly affect land value, just as it affects rental value.
When interest rates are low, buyers have a greater incentive to buy property, since mortgages now attract low-interest rates. However, this increased desire and ability to buy can only cause a rise in the prices of property. Thus, prices of properties have to be set based on government policies about interest rates at any given time.
Migrations from one place to the other causes impact in property prices. For instance, places where people migrate to face housing problems since housing often fails to keep pace with population growth.
If not quickly controlled, it causes a chronic housing crisis that ensures house prices remain high and vice versa.