Property basics: How does the real estate market work?

How the real estate market works

 

The long-term trend of property in Australia has shown an increase of between 8% and 12% per annum (depending on the source).

There are several factors which influence property prices, including;

– Supply and demand
– The general economy
– Interest rates

Supply and demand

Like any product, pricing of property depends on supply and demand. When real estate is in demand, prices go up and when there is a surplus of supply, prices may fall. With a steadily increasing population, and a reluctance of some governments to release new land for housing many sources suggest that there is (and will continue to be) an undersupply of property in Australia. This suggest that demand will remain relatively high as there are more people looking for property than there are properties.

The general economy

The health of the economy often determines, in the most basic sense, how much money there is around. When there is “more money around” people are more willing to spend. People are also more likely to take risks and make large purchases and are therefore more likely to buy property. This, in turn, increases the demand. When money is tighter, people tend to save more money and thus the demand reduces.

Interest rates

Most people require a loan to purchase property and, as such, interest rates can serve to make property more or less affordable. Higher interest rates tend to increase repayments on property and therefore make purchasing more difficult. Lower interest rates decrease repayments making property more affordable.

Of course there is a complication; when the economy heats up and there is more money, borrowing is easier and often interest rates rise. The increase in demand caused by a stronger economy can trade off against the decrease in demand caused by higher interest rates.

Where are we now?

Far smarter people than me are arguing about the state of the Australian housing market at the moment. Some economists are predicting considerable (up to 20% over the next three years) rise in house prices while others are predicting the opposite. The local market has definitely softened recently from highs that saw values generally well above long-term trends.

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