In recent times, the real estate market has gained so much attention as a result of the increased activities of investing, buying and selling going on within the industry. This increase has cut across the industry globally.
The size of the professionally managed real estate market also continued to grow in 2021, rising to USD 11.4 trillion from USD 10.5 trillion in 2020. The Americans contributed 40.2% of the overall market size estimate.
So far, the prices of houses, which are a component of the real estate market, have remained strong in 2022. However, there have been recent predictions that the real estate market will experience a 0% profit in 2023. These predictions could be attributed to some factors, which we are about to look into in this article.
What is the Real Estate Market?
Real estate is defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or man-made.
According to the Cambridge dictionary, Real Estate Market is defined as the buying and selling of land and properties.
Read Also: Tokenizing Real Estate
Top 10 Factors Affecting the Real Estate Market
- The Economy
- Employment
- Government Involvement
- Location
- Supply and Demand
- Demographics
- Technology/ Innovations
- Taxation
- Interest Rates
- Societal Values
1. The Economy
The real estate market is largely a mirror of the economic situation. It is, however, a part of the economy that will always be in high demand because it provides one of man’s most basic needs: a place to live. To understand the economy’s impact on the real estate market, it is important to study the Economic cycle which consists of four stages;
- Recovery: At this stage, prices can be relatively low which makes it a perfect time to acquire as many properties as possible
- Expansion: In this stage of the economic cycle, it’s still possible to find a good value on an investment property during the expansion phase as demands also increase
- Peak: This stage of the economic cycle witnesses the highest output and a decline could most likely begin.
- Recession: After a business cycle has hit its peak, there is nowhere else for things to go but down. Sales and employment gradually begin to drop.
2. Employment:
An increase in job opportunities and expansion in commercial activities would always cause a high demand in the real estate market.
3. Government Involvement
In some circumstances, the government can intervene and affect the real estate market. A government might offer subsidies or credits to buyers to help wake up a stagnant market.
Governments can influence the real estate market in other ways, as well. For example, changes in tax law can make buying property more or less appealing. Fluctuations in interest rates can also help to attract or repel buyers.
4. Location
This is also an important factor affecting the real estate market. For instance, commercial and recreational activities could cause an increase in demand for real estate within a particular location. Good access roads and other social amenities within a certain location affect the price of the market
5. Supply and Demand
The general law of demand and supply by Alfred Marshal states that; an increase in supply causes a decrease in demand and vice versa. But when there’s less demand for property and fewer buyers out looking for real estate, the situation flips. The market becomes a buyer’s market.
6. Demographics
The expectations of the recent generations in houses have improved. This has also been a contributing factor in the real estate market.
The class of people living within an area is a contributing factor. For example, in an area with a university, there would be a lot of demand for houses that are small, stylish, and modern.
7. Technology/ Innovations
With the recent growth in technology, online shopping has also become a norm for the real estate market. Most people have adopted a more convenient way of buying properties.
Sellers can now target their buyers easily and buyers are also able to filter a list of properties to potentially get what they want from any part of the world.
8. Taxation
Although a lower tax bill isn’t the sole reason why people purchase property for residential use or as an investment, the potential for a lower tax bill is an added benefit. If tax laws change and eliminate many of the incentives for buying property, there might be a reduction in sales or less demand for real estate as an investment.
9. Interest Rates
Interest rate is very important determining factor of the real estate market. The more an investor needs to pay for financing, the less net income they are likely to see from renting out the property or using it for other commercial reasons. Higher interest rates can translate to higher risks for investors, which can push the prices and values of investment properties down. Also, the higher the interest rate on a mortgage, the less appealing it becomes. Therefore, a lower interest rate favours the real estate market.
10. Societal Values
Changes in society can also have an impact on the real estate market. For instance, a society that allows for no more than 2 children per family and does not encourage children to live with their parents beyond a certain age, would only mean that the demand for houses that would contain a large family would be less.
Environmental Factors Affecting Real Estate Industry
The value of real estate is undeniably tied to the quality of the environment. There are environmental factors that need to be considered for a real estate market to bloom and some of these factors include,
a. Quality of Water:
Water is very essential for living so the need for quality cannot be negated. For instance, the water areas of Lagos state (Island) are notably known to be bad water. Therefore, for the real estate market to continue to thrive in this location, the cost of good water treatment is factored into the entire cost of property.
b. Road Accessibility:
Areas with really bad road systems have less demand than areas with good road systems. The value of a property depends on the comfort the property is expected to bring and a bad road is uncomfortable for living.
c. Soil/ Topography:
Determining these factors can be high level but the effects are largely visible. The way land is situated would have adverse effects on the properties in that location. For instance, properties near water bodies are prone to flooding.
d. Climate:
Locations with extreme weather conditions most likely have fewer commercial and human activities going. Those areas are less conducive for living, therefore the real estate market cannot thrive as it does in more conducive locations.
e. Wildlife:
For a more practical understanding, lands in forests are in less demand because they are habitats for different wildlife that cannot cohabit with humans.
Legal Factors Affecting Real Estate Industry
- Delay in issuing land use right certificate (LURC) for foreigners
Decree 99/2015 says that foreigners can’t own homes in security and defense zones set up by the Ministry of National Defense and the Ministry of Public Security. On the basis of this list, the provincial People’s Committee will require local Departments of Construction to issue a list of commercial housing complexes where foreign organizations are prohibited from owning homes (Foreign Ownership Prohibited Projects List). No such list has been released to date. Because of this, the provincial Department of Natural Resources and Environment has put off dealing with LURCs. This major issue has led to buyer confusion. Even though it seems like a good thing that the government has made it possible for foreigners to own property in Vietnam, the lack of important rules has made foreigners skeptical about getting into Vietnam’s real estate market.
- Uncertainties in the required approvals for residential developments
It is unclear under what conditions a transfer of land is covered by State allocation and lease. According to Article 32 of the Law on Investment (LOI), the in-principle investment decision (IDD) is applicable to projects for which the State grants or leases land without auction, tender, or transfer. In contrast, the Land Law mandates that investment projects can only acquire land through allocation or lease. It is unclear under what conditions a project can acquire land via transfer. Normal company operations continue to be hindered by the lack of specific norms.
References
- www.tranzon.com – Factors That Influence the Future of Real Estate.
- www.graana.com – Effect of Environmental Factors on Real Estate Value
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