Have you ever wondered what it really is that can explain the changes in property prices? In this article, I will go throught the main causes for the property prices´ shifts. This knowledge has been gained from over two decades working as a realtor.

How to calculate the next price move? How does one determine when it is best to invest? Most buyers just watch for the previous direction of prices. To say it differently, what buyers expect is mostly influenced by previous movement. Should prices go up, they will expect a similar growth to go on, and visa versa. Eventhough such a strategy does not consider the real factors that have an impact on the price, it is applied. It is not adviceable to rely too much on such a strategy as the result may be very unwanting as we saw recently.

What economic factors have the most significant effect on how prices are formed?
– Economic growth
– Nominal interest rates (before inflation) and structure of mortgage products
– Inflation
Let’s look at these factors in more detail.

Strong economics is imperative for just about any business out there and real estate is no exception. One reason is that strong economics will positively push up the prices of property as it reassures buyers that the demand for housing will keep on growing, their property will increase in value and they will be able to make profit when passing it on again. Regarding the BIS Quarterly Review, 1% of GNP increase is connected with 1% to 4% property price rise after 3 years.

For the property prices to grow you firstly need plenty of eager buyers. One implication of the fact that house lones have to be arranged when anyone wants to buy property, is that there will be many buyers who will go rather for houses with interesting mortgage products that includes low nominal rates. According to the same source, only 1% decrease in nominal interest rate are connected with 1/2% to 1% of property prices growth after 1 year. Similarly, buyers get easily influenced by the smallest rise in the nominal interest rate which in reaction causes a settling of property prices. On the other hand there are exceptions to the rule. For instance – a credit crunch occurs when official interest rates become of less importance and the loan market gets driven by different factors. It concerns the real estate market as well.

Inflation influences changes in the level of interest rates while the interest rate strongly impacts property prices. Countries get influenced differently by high inflation. In such countries, where investing in property is perceived as balancing the inflation, higher inflation in fact rises the property prices (Germany would be a good example). Such countries may be characterized with fixed interest rate loans with no equity withdrawal. On the contrary, high inflation has a negative effect on property prices in countries by either floating interest rates like the UK, or fixed interest rates with equity withdrawal, for example the USA.

Each rule has an exception and numbers and values mentioned don’t have to suit your neighborhood. It is realtor’s business to see the exceptions and differences. It is, however, important to realize that there exists a general system by which real estate prices are created on the market. Do not be trapped by shallow attitude. It is necessary to take in all matters connected with the market.