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13 factors that influence property markets

To establish the best property investment strategy for you, one that will work in with your plan in terms of your financial capability, goals and risk profile, you need to have a basic understanding of how property works as an asset.

With ongoing capital growth and income being the primary drivers for any property investment portfolio it is good to know what factors influence these two key elements. By understanding what makes property tick, you can confidently assess what type of real estate asset will be right for you to meet the requirements of your overall plan.

Property is a fairly simple commodity whose value hinges largely on supply and demand, with a whole lot of macro and micro influences that swing this supply and demand balance one way or another.

Sometimes the prevailing economic climate will see supply increase and demand decrease and sometimes it will see demand increase and supply decrease. The point is, there is rarely equilibrium between supply and demand and it is this swinging pendulum that sees property prices rise, stagnate or fall, creating what we know as market cycles.

So without getting overly complex, let’s take a closer 13 macro and micro influences on property markets and the underlying supply/demand equation that makes real estate tick.

Macro factors

These are the prevailing economic and social conditions of the day. Macro influences are largely out of our control, being determined by things like government policy, world events and social phenomena.

Macro influences on property include:

1. Net population growth (including migration). This is a big one in Australia, with our population projected to grow exponentially over the coming years, placing increased pressure on an already undersupplied housing market. It’s expected that increased demand from migration will be the primary driver for our property markets into the future, as we already have too few dwellings to house our population. Many experts and economists predict this intensity of demand will prevent Australia’s property markets from experiencing any sustained crash in values.

2. Dwelling construction. Directly related to our growing population and housing shortage is the rate of new dwelling construction. In slower markets, profit margins tend to shrink as building expenses continue to increase while buyer demand dries up, making large developments a lot less attractive.

This almost seasonal viability of large construction projects means building them can slow down or conversely, speed up considerably if the markets are hot with buyer activity. This issue of tightening housing supply obviously correlates with heightened demand from our growing population to maintain pressure on property prices in the long term.

3. Wages growth and employment. The way human nature works, when we perceive things to be good because wages are on the rise and unemployment levels are low, consumer confidence is at its peak and people are willing to spend their money. Often in this type of fruitful economic environment people are more willing to take on debt and make large financial commitments such as buying property. This in turn means an increase in demand that pushes property values up. Of course the contrary is also true. When wage growth slows and unemployment rises we start to question our financial security and become unwilling to part with our money, meaning demand decelerates and values naturally come off the boil.

4. Access to finance. This is a really interesting macro factor here in Australia. During 2008’s GFC we saw the US property market take an almighty dive; pushed too far because of easy access to finance. Money was being handed out like candy, which poured a huge amount of capital into the system and buoyed the local market for some time.

Of course things came to a head when people who should never have qualified for a loan in the first instance simply stopped making their repayments because they could no longer afford them. Much the same occurred in the UK. Then this frivolous borrowing went the other way, to the point where there was almost no access to finance. This caused the US and UK housing markets to come to a screaming halt.

Therefore, it’s obvious that access (or a lack thereof) to credit is an important macro driver of our property market in Australia too – if the banks refuse to play, real estate sales will invariably slow..

5. Government policy. A great example of how government policy can change the supply/demand balance in our housing markets is the First Home Owners’ Grant. With the introduction of the grant at the beginning of this decade we saw the start of one of the largest property booms in our history (the grant was not solely responsible for the boom of course). The enticement of ‘free’ money was too much for some people and many new homebuyers entered the market all at once, intensifying demand levels substantially.

Then when the Federal Government doubled the incentive in 2008/09 (First Home Boost), we saw the more affordable sectors of our housing markets (that traditionally appeal to first home buyers), enjoy a mini-boom of sorts as thousands of young house hunters took advantage of the handout to live their own Great Australian Dream.

Most Australians have a lot of their household wealth tied up in property (more so than in many other countries). This is why the government will always try to help the property market with policy. Nothing destroys consumer confidence more than people seeing the value of their homes plummet. Nothing hurts economies more than drastic falls in consumer confidence. You get my drift?

6. Land supply. Logically, when there is a glut of developable land available, price growth within that housing market will be somewhat restricted. This often occurs in outer urban areas where there are vast tracts of land. Conversely, in those areas where land is scarce and development is restricted, whether it be by natural forces such as the water in coastal regions, local government planning regulations or simply the fact that there is no more land to develop such as in inner-city areas, supply constraints often underpin property values and insulate them from severe falls.

7. Investment in infrastructure. When local, state or federal governments are spending money in a particular area you can generally rest assured that local property values will hold their own over the long term. Investment in an area, through new infrastructure works and by private enterprise, is always a good indication that population growth is expected to continue, which in turn means the underlying demand for property will continue.

Micro factors

Micro factors are the more immediate influences on property values in a given area. They include things like:

8. Location to amenities. Communities naturally require certain services and amenities to sustain them over the long term. Not only do these amenities make an area more liveable, they also provide critical employment opportunities for local residents. Important amenities that can make or break the long-term viability of an area in terms of underlying demand and therefore the stability of local housing values, include things such as schools and child care, public transport, access to major arterial roads, shops (particularly supermarkets and shopping centres), hospitals (health care), parks and water supplies.

9. Council planning regulation. This can include things such as restriction on development, which again will directly affect the local housing supply and, therefore, property values over the long term.

10. Streetscape. Let’s face it; some areas are just nicer than others. Obviously, the greater the aesthetic appeal of an area, the greater the underlying demand for housing will be.

11. Block orientation and views. It is said that a good view will nearly always command a higher price when it comes to real estate. Some properties will always be in greater demand because of their outlook and/or how they are situated on the block. For instance, it is well known that a north-south orientation makes far better use of that natural and free resource – the sun.

12. Architectural style. Not only is scarcity value in property determined by the overall land supply of an area, it is also influenced largely by architectural style. Buildings that cannot be easily replicated, particularly those whose design elements hinge on a specific bygone era, will always be in greater demand and shorter supply than their generic counterparts. Styles such as art deco and period homes like Edwardian and Victorian are simply not built any more. These properties take on a rarity value in much the same way as antiquities and in almost every case will maintain their value into the future.

13. Floor plan. A good floor plan, where all the space is used and flows harmoniously, will always be easier to sell than a disjointed, unliveable one. Something as simple as bedroom and bathroom positioning in relation to the living areas can make a house more or less desirable and hence, increase or decrease buyer demand.

So what do all these intrinsic value drivers of property mean to the property investor? Essentially, you need to understand them to get your strategy right and be able to successfully determine the best property investment for your portfolio requirements.

Additionally, you need to keep in mind that even though all it takes is just one macro factor to go wrong for the entire market to be adversely affected in the short term, inevitably things will turn around. That has been proved to us time and again; so don’t get caught up in the moment. Property really is one of those assets where the devil is in the detail, but if you can keep the long-term view in mind and stick to the time-tested fundamental factors, you will avoid becoming a statistic.

For more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment goals and strategies, click here to contact us, or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au

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