What causes the rise and fall in Property Prices?

house and coins

Property prices rise and fall in the property market with respect to demand and supply. This tangible asset is subject to laws of supply and demand just like for stocks and bonds. Both increase and decrease in the prices are often unpredictable. The more is the demand, the more the property prices tend to rise. With the increase in supply, property prices tend to fall. This basic economic principle explains the basis behind the increase and decrease in house prices.

What makes property value increase?

Basically, house price increases when demand for houses is not met. With immigration and overpopulation, the availability in the housing market might be low. While in some cases, the housing market is monitored by a few property developers intentionally restricting the supply in order to maintain the high value of the houses.

In most scenarios, people often can’t afford to buy a house based on their savings alone which is why they opt for getting a mortgage for the home value. With the debt, the demand for housing and the buyers are limited depending on how much money a bank can lend. That being said, the limited supply of land and the buyers balances on the left with demand on the right, just like in a see-saw. Tilt on one side results in tilt on the other in the opposite direction.

A decline in Property Value Overtime

There are various factors that can cause a decline in property value. These factors range from something as simple as an increase in interest rate to something as unpredictable as natural disasters. Mortgage rates affect both buyers and sellers. When the interest rates are low, affordability is increased for potential buyers. But with the higher interest rate, the affordability decreases thus narrowing down the prospective buyer. In order to reach the affordability of more buyers, you might have to decrease your house rate thus resulting in a decline in property value.

The natural disaster-prone areas significantly have the lower interest of prospective buyers. The need for insurance against these disasters impacts your home value and people aren’t often at ease about buying a home in such places. Another reason for a decline in property value would be short sales or foreclosure in and around your area. Even a single short sale can significantly impact the comparable prices in the area. Any foreclosed property in your immediate neighborhood can depreciate the value of the entire area.

Supply and Demand - What is Housing Demand?

The basic economic principle of supply and demand works just as similar to that of any goods or service. With the high demand, the prices increase, and with large supply and not enough demand, the prices decrease. Similarly, in the housing market, low supply hikes up the prices. A specific property with multiple prospective buyers often has a higher price as the buyers overbid each other increasing the purchase price offer.

When there is a high demand for properties in a particular area with a low supply of quality property, the price tends to rise. In a similar manner, when there is an oversupply of properties followed by low to no demand for housing, the price tends to fall.

The Ripple Effect in Housing Market

Just like rippling waves in a pond, the growth in property price extends from one location to the other in no time. The effect usually begins from capital cities extending out to neighboring suburbs. People mostly prefer moving into cities in order to stay close to their workplace. With too many people flocking into the area, the housing demand increases thus increasing the prices. Property prices in these areas hike up making it less affordable. Next, potential buyers explore properties in the surrounding suburbs. Here, the property prices would not have caught up with the price growth but eventually with an increase in demand to acquire property, exceeding the supply even in these areas, the property prices in suburbs catch up with the prices in the cities. It then reaches up to the mountain or coastal areas. Ultimately, the price ripples from the city areas towards surrounding and outer areas. Thus resulting in the rippling effect in the housing market.

Author:

Kiran Thapa

Ushma Shrestha

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