Real estate makes up a massive portion of most people’s wealth, even those who have never even considered getting into active property investment. The sheer scale and relative stability of the real estate market make it an exceedingly attractive prospect for many modern investors. If you’re considering getting your own property portfolio off the ground, here are the three major factors which influence it.
Government Policy and Subsidies
Legislation is one of the biggest factors which can influence the demand and prices of real estate. Tax credits, subsidies and deductions are just a few of the ways the government can boost demand for real estate, provided that these initiatives remain in place. By staying on top of the current political landscape, you can better understand and predict changes in supply and demand, and identify false trends. In 2009, for example, the US government introduced tax credits for first-time homebuyers, in order to stimulate a sluggish economy with more home sales. Today, the 1031 Exchange is at risk of being repealed by congress, which will be a major blow to US real estate demand. However, this movement may be countered by a bipartisan organization standing up for the middle class. There are many ways political shifts can affect the property market, so I suggest brushing up on your history!
Interest rates are another major factor which can have a huge impact on the home market. When interest rates fluctuate, it can have a serious effect on a person’s ability to purchase a piece of real estate. The lower interest rates drop, the lower the cost to obtain a mortgage and buy a home will be. This, in turn, creates a higher demand for property, which in turn pushes the prices back up again. On the other hand, interest rates getting higher means the cost of getting a mortgage goes up, causing both the demand and prices of real estate to go down. However, things aren’t always this black and white. When it comes to the impact of interest rates on equity investments, it behaves a little more like a bond, with the value of bonds going up as interest rates decline.
Closely related to the two factors above, the economy is the third big factor you need to monitor and understand when you’re taking your first steps into property investment. This is generally monitored by factors such as GDP, employment rates, the prices of goods, manufacturing output, and so on. Generally speaking, when the economy’s not looking too healthy, the real estate market isn’t either. Having said that, the cyclical nature of developed economies can affect different types of real estate in different ways. For example, if a real estate investment trust has a large percentage of its overall investment in hotels, it will usually take a greater blow after an economic downturn than one that has a greater investment in office blocks.
If you’re set on opening up a property portfolio, be sure to monitor and understand these three factors.