What Really Drives House Prices?
One common investing myths is that ‘one’ factor drives house prices.
These ‘one’ factors are often quoted by arm-chair experts who claim they know where house prices are heading … and the reason why.
Except the reality is far different.
No single factor drives the market.
There are actually a number of factors which combine to drive house prices.
At any one time, some factors are pushing prices up, and some others are pulling them down. It’s the overall combination of these factors which determine what happens.
After all, how have house prices continued to rise even as interest rates soared?
We’ve just been through a cycle of shockingly high interest rates, plus uncontrolled inflation.
And traditional wisdom tells us that house prices should have tumbled.
The reason this happened is because other factors proved too strong.
To give you a better insight into the market, here are the 5 biggest factors which all combine.
Interest rates
You can’t look at house prices without looking at interest rates.
Low interest rates give people more borrowing power, and this means there’s more money available to spend on houses.
It also means more people are able to borrow money, and as a result there’s more people fighting over houses, putting upwards pressure on prices.
However, when rates increase the opposite happens. There’s less money in the market and less buyers, which of course puts downward pressure on prices.
Demand
Demand measures how many people are in the market for houses.
The higher the demand, the higher house prices go. You’d expect this when lots of people are competing against each other
Conversely, lower demand means downward pressure on prices as there’s less competition.
As you might expect, one of the biggest drivers of demand is population growth, and right now, immigration is at record highs.
Supply
Supply is on the other side of demand.
And when it comes to real estate, the more houses there are available, the less people are fighting over each one.
Lots of new houses, i.e. more supply puts downward pressure on prices, while limited supply puts upward pressure on prices.
After Covid smashed the building industry around and played havoc with materials, supply is very low.
And it’s not showing any signs of changing soon.
Employment
Employment plays a major role in driving house prices.
Secure employment gives people confidence to buy, and of course the money to do so.
It also drives people to different parts of the country as we’ve seen in Western Australia and different regional areas.
When employment booms in an area, the increased demand for housing forces prices higher.
It can also result in higher wages, which means people can borrow more.
On the other hand, as we’ve seen in the past, when industries close down and jobs are lost, house prices fall as well.
Economic Growth
As the nation’s economy grows, the property market grows with it. A higher GDP is a sign of economic prosperity, which brings jobs, spending and investment.
In turn, more infrastructure is needed which fuels even more growth.
Plus it brings new confidence to the market, with more people wanting to buy and invest.
The opposite to this are … economic downturns.
Downturns are part of a healthy economic cycle.
As the economy slows or even shrinks, there are job losses, less money in the economy and lower confidence.
When this happens, demand for real estate falls, and some home owners are even forced to sell.
The result of this is downward pressure on prices.
Having said this, economic downturns can be excellent for investors who snap up bargains.
Where does this leave you?
By now, you can see there are plenty of factors which affect the property market.
I’ve just given you 5 of the biggest ones.
At any time, some of these factors are putting upward pressure on prices while others are putting downward pressure on them.
At times, the upward pressure is so strong that we have property booms.
On the other hand, at times the downward pressure is too strong and prices stagnate or drop.
As investors, our job is to look at all the factors which impact house prices to determine what to buy, and where.
If you haven’t watched it already, we cover this and more in our comprehensive Masterclass Series on real estate investing.
It’s free, and you can watch it by clicking here.
Alternatively, if you’re looking for more tailored advice on how these factors will affect your financial position and how you can capitalise on the current property market – you can book a free consultation by filling out the form below.