A property or piece of real estate accounts for a noteworthy share of someone’s wealth.
On the other hand, the real estate market is a profitable and attractive sector for many investors simply due to its size and scale. To get a better understanding of this sector, we are going to dive deep into the primary factors that affect the market and the variety of investments available.
- I) Demographics
Demographics is defined as statistical data that relates to populations and groups within a specified area or region. For this reason, it will include data like age, race, gender, income levels, migration patterns, and the growth of that region. These are statistics that are often ignored or overlooked, but play a significant role in determining the pricing of real estate and the type of property being demanded.
Did you know that governments use demographic information to distribute resources? Yes. This is why major shifts in demographic data can have a huge impact on real estate trends for many years.
A good example is the transition of those who were born between 1945 and 1964 into retirement. According to market research, those born between these ages will contribute to a more interesting generational trend in the last century. The retirement that began back in 2010 will indeed have an impact on the market for years to come.
Because there are several ways a demographic shift can affect the real estate market, and for an investor, there are several questions they must get answers to. These questions are: –
- How would this affect the demand for second homes in famous vacation areas as more people begin to retire?
- How will it affect the demand for larger homes?
These are but a few examples of the questions an investor must have answers to – to make it possible for them to narrow down the location and type of real estate that is most desirable to invest in.
- II) Interest Rates
Interest rates have a major impact on real estate, especially if you are considering buying your home using a mortgage. This is why it is so important to first research the interest rates using a mortgage calculator. Remember, any changes to the interest rate can affect you and your ability to purchase a residential property.
Remember, the lower the interest rate is, the less it will cost you to obtain a mortgage to purchase a home. On the other hand, if the interest rate is low, it will create a higher demand for real estate, which again will increase the purchase price.
You must remember that if the interest rates increase, it will increase the mortgage, which will also decrease the price and demand of real estate.
III) The Economy
This is another factor that affects the value of the real estate. An economy’s strength or weakness is measured by several economic indicators, like employment data, GDP, the price of goods, manufacturing activity, and more. It is important to note that whatever happens to the economy will affect real estate directly. Therefore, this means that whenever an economy is sluggish, so will the real estate market. However, it will affect different types of estates differently. There are always options if you want to sell your house fast.
For example, if a REIT’s largest percentage is invested in hotels, the economy will only affect the ups and downs of the hotel, as opposed to a REIT that invests in office buildings. That is because hotels are a form of real estate that is very sensitive to economic changes. If economic conditions are unfavorable or poor, it is very easy for a customer to avoid staying at a hotel or renting a room. On the other hand, office tenants have longer leases that cannot be changed easily in the middle of an economic downturn.
- IV) Government Subsidies And Policies
Government legislation is one factor that can have an impact on property demand and prices. A few examples of these are deductions, taxes, credits, subsidies, and others. Depending on government policies, it can either boost or decrease the demand for real estate – if the policies are in effect. This is why investors and anyone interested in investing in real estate should research current government incentives to determine the demand and supply chain to identify false property trends.
A good example is the 2009 first-time homebuyer tax credit that was introduced by the U.S. government. This policy helped increase the value and demand of property among first-time property buyers with the idea of jump-starting home sales in a sluggish economy. Anyone who purchased a home between 2008 and 2010 was eligible to receive the tax credit. The policy was very successful because over 2.3 million people took advantage of the tax incentive.
If you look at the numbers, this was quite a sizable number. Remember, the tax credit investment was a temporary government policy that increased the demand for property. Without knowing this, one may have easily concluded that the demand for housing was going up. An average investor buying real estate indirectly will experience lower risks with higher returns if they buy through ETFs, REITs, or other managed funds compared to those who choose to go directly.
What Is The Best Investment?
The real estate market is attractive and lucrative for many people. That is because it is not only big but also allows investors to invest directly in physical real estate or indirectly through managed funds. When it comes to direct investments, it generally involves buying real estate for residential or commercial purposes and using it to generate income either through leasing, renting, or reselling.
The indirect method involves investing in real estate through investment trusts (REITs), ETFs, CREFs, or infrastructure funds. A majority of average investors prefer indirect real estate investments because of their higher liquidity in the market, low capital requirements, and low transaction costs needed. To become an investor, you need to know and learn the factors that will affect the market and the best type of investment for you.
The Summary
In this short document, we have only covered the primary factors that have a huge impact on the real estate market. However, you should note that other complex factors do affect the real estate market. On the other hand, although the mentioned factors affect the market directly, it is important to note that each affects the market differently. The goal is to know and understand the key factors that drive the real estate market so that you can make informed decisions after evaluating a potential investment opportunity. In a nutshell, the information provided should help you make the correct choice based on what you are looking for in a real estate investment.
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