The question “What determines house price?” is one that those that people in the real estate industry hear time and time again regardless of the state of the market. In a fast moving market buyers will want to know why the prices are rising so fast and in a slow moving market sellers will want to know why their houses are not selling.
When an investor understands the market movement they are in a better position to capitalise on the market and hopefully maximise their profits. Generally speaking the market has a 6 – 9 year cycle between highs and lows and even an investor who uses the ‘buy and hold’ strategy could consider selling at the high of the market.
What actually influences the price of properties in the market place is quite simply – demand and supply. This is so for any product that is sold.
With property prices those properties in prime position will demand much higher prices than those that are in say, a rural area. For example, as we all know, properties that have water frontage, whether it be sea, river or canal frontage demand a much higher price than those that do not. Similarly, properties that are in areas where building is limited, such as the CBD also get higher price increases than those that are not in such a high demand area.
Looking at these examples, the water frontage properties will not decrease as much as others in a downward cycle because there will only ever be very little extra water frontage whereas in a CBD area for example, the number of high rise apartments and the lack of employment in a down cycle could lower the prices of these apartments faster due to vacancies or supply and demand.
So what is it that causes the change in prices?
the money market as in the Global Financial Crises that affected the money market interest rates availability of finance Government management in general but also their decisions regarding land releases and other factors that free up land or encourage building return on investment prospects of capital growth
Interest rates go down when the economy is suffering, but also at that time the banks tighten their belts and finance for homes and investment properties is not so readily available. Therefore property sales slow and prices decrease. When the economy is booming the banks are handing out money in all directions which means more and more properties change hands and when this happens the price increases as demand increases.
Economic factors are:global factors that affect our economy in Australia employment and the short term view of employment by the banks
Peter Koulizos, a lecturer and author of The Property Professor’s Top Australian Suburbs (John Wiley & Sons) says that “One of the key indicators that demand for property will increase again is when unemployment peaks then starts to drop again……. Keep your eye on unemployment figures, especially when respected economic and property forecasters start to talk about “unemployment nearing its peak”.