Most people’s wealth is in real estate. For example, in the United States alone, by 2019, 65.1% of families owned a home. This is per a Federal Reserve survey on consumer finances. The real estate industry is lucrative and attractive, and that is why many investors choose to invest in it. In this guide, you will learn some of the important factors that drive the real estate industry.
1 .Population Composition
In other words, called demographics, population composition gives data on population growth, migration patterns, income, gender, race and age. Most investors overlook this data, but it dramatically affects the prices of properties and the type of real estate most demanded. Significant changes in the composition of a population can significantly affect the properties market for many years.
For instance, people born after the 2nd World War, i.e. 1945-1964 are a great example of a population trend with the ability to affect the properties market significantly. In the last 100 years, the transition of those people to retirement is a generational pattern that has excited the real estate investors. Moreover, their retirement, which started in 2010, is expected to be recognized in the markets for many years.
Ways in which such population changes influence the properties market are many. However, if you are an investor, you need to ask yourself these questions:
a) How will second homes demand be affected by this transition in famous vacation destinations as the number of retiring people continues increasing?
b) How will larger home’s demand be affected by reduced incomes and moving out of all children? You should ask yourself these two questions to help you select the location and kind of property that will be in high demand before the trend begins.
2 .Rates of Interest
The rates of interest profoundly influence real estate markets. If you are thinking of buying a house using a mortgage loan, it is vital to find out how much interest you will pay using a mortgage calculator. Shifts in interest rates significantly affect a buyer’s ability to buy a home. If the interest rate is low, the cost of getting a mortgage loan will also be low, and that will increase the demand for residential property. This high demand leads to increased prices. If you have been looking for a property, you may want to check property listing platforms such as Movoto.com.
On the other hand, increase in interest rates reduces the ability of buyers to purchase homes because it is expensive to obtain a mortgage loan meaning there will be a low demand and in turn, the prices will go down. But the effect rates of interest have on residential properties, and equity investments like real estate investment trust are different.
In the case of REITs, the relationship with interest rates can be viewed as identical to that of bonds with interest rates. A decline in interest rates increases a bond’s value since its coupon rates become more enticing. Increase in interest rates decreases the value of bonds.
Identically, a decrease in interest rates in the market increase the attractiveness of REIT’s high yields, causing their value to increase. An increase in interest rates reduces the attractiveness of your return on REIT, lowering their value.
3 .The health of the Economy
The health of an economy is another important factor that significantly influences the value of properties. Usually, this health is determined using economic indicators like the price of services, manufacturing activity, employment data and gross domestic product.
But economic cycles have different effects on various types of property. For instance, if a REIT has invested a lot in the food industry, economic downturns will affect it more than a REIT whose more significant percentage of investments is in office buildings. The food industry, particularly hotels, are highly sensitive to economic factors because the business is based on a lease system.
Leasing a hotel room is temporary, and customers will shy away from such when the economy is performing poorly. On the contrary, office buildings are typically leased on a long-term basis, and this cannot be changed amid disruption in the economy.
Therefore, even though you should be keen on economic cycles to know where you are at any given time, you need to be aware of the type of property that is highly affected by that cycle.
The scale and size of the properties industry make it lucrative and attractive for all investors. As an investor, you can select to invest indirectly, for instance, with REITs or directly in physical property. The factors discussed in this article are some of the top elements that play a major role in driving the property market. There are so many other factors, such as government subsidies and policies that have a huge impact on the market.
Moreover, even though these factors show a distinct relationship between the market and the factor, in reality, the outcome can be different. But knowing the key elements that move the properties industry is essential to conducting a detailed evaluation of an investment.