Determinants of Demand of Real Estate
Determinants of Demand of Residential Real Estate Demographics Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns and population growth. It is obvious that as the population increases, so will the demand for housing. As the income increases, so does the demand of real estate as people would be willing to pay higher prices. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand.
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Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. Interest Rates Interest rates also have a major impact on the real estate markets. Changes in interest rates can greatly influence a person’s ability to purchase a residential property. That is because as the interest rates fall, the cost to obtain a mortgage to buy a home decreases, which creates a higher demand for real estate, which pushes prices up. Conversely, as interest rates rise, the cost to obtain a mortgage increases, thus lowering demand and prices of real estate.
The consolidated net profit of India’s largest real estate company, DLF Ltd, dropped 11 per cent to Rs 372 crore during the second quarter ended September 2011 from Rs 418 crore in the corresponding period last year due to the high prevalent interest rates. The origins of Indian Property Market Bubble can be traced to the interest rate reductions made by the NDA coalition government in the years following 2001. Home Loan Rates fell to a (then) historical low of 7. 5% in early 2004. This prepared the basis for the increase in real estate property prices across India.
Low interest rates triggered interest in individuals to borrow to own their own homes and this triggered an increase in demand for real estate across India. The Indian Property Market has been growing fast since March 2005, when the current UPA government decided to open FDI in Real Estate. The Economy Another key factor that affects the value of real estate is the overall health of the economy. This is generally measured by economic indicators such as the GDP, employment data, manufacturing activity, the prices of goods, etc.
Broadly speaking, when the economy is sluggish, so is real estate. Retail and IT sector had created a very fast pace of demand in Indian real estate sector which have gain a very high impact image of investing in India. Till October 2008 the real estate sector was a very booming sector in India. The impact of recession in US economy badly hit Indian real estate market. Investment in real estate sector became stagnant. Government Policies/Subsidies Legislation is also another factor that can have a sizable impact on property demand and prices.
Tax credits, deductions and subsidies are some of the ways the government can temporarily boost demand for real estate for as long as they are in place. Being aware of current government incentives can help you determine changes in supply and demand and identify potentially false trends. For example, the government might give tax credit to homeowners in an attempt to jump-start home sales in a sluggish economy as done by US in 2009. Favourable Business Climate Favourable Business Climate spurs the demand for Real Estate projects. The liberalisation of Indian economy in the 1990s brought a rapid influx of FDI in India.
The entry and growth of IT and BPO industry generated rapid employment growth which increased the demand for housing. Unemployment As unemployment rises, people who have either lost their job or fear losing their job do not move to a larger rental apartment and do not move from a rental unit to purchase a residence whether it is a single family home, co-operative apartment or a condominium. As unemployment rises, companies do not increase their need for office space and may shed excess space adding to the vacancy and availability rates.
It is easy to see how the fundamentals of real estate are most stressed when unemployment reaches its peak. Age The demand for older properties is mostly always likely to be greater than the demand for modern properties. In one and two bedroom buy to let new build flats, in some areas there is a potential over supply of these properties but even where there is not an over supply, the supply is such that purchasers, and ‘buy to let’ tenants are in a stronger position, given the wider choice available to them.
Consumer Confidence Consumer confidence is important. If people think the state of the economy will worsen people will become less optimistic about their futures (worries over unemployment, falling incomes and increasing interest rates) and consequently people will be less willing to pay high house prices and first time buyers may be less willing to enter the market.
This affects demand and prices may increase less quickly or fall. Expectations of future price movements This can have a considerable bearing on the demand for all types of property. If house prices are expected to fall people will be reticent to buy a new house and if prices are expected to increase this will encourage people to buy a new house.