Property 101: Property Value
There is a vast range of different factors that influence the value of properties, which is why you’ll notice conflicting views and forecasts from a raft of legitimate sources. No two economists ever seem to have the same view of where the market is at, but there are a few points they will agree on.
Supply and demand is an economic principle that applies to almost any market, beit housing, used cars, petrol or milk solids. This principle says that for a normal commodity that is for sale, it’s price will be determined by how much of it is available (supply) compared to how many people are willing and able to buy it (demand).
On the supply side of the property equation, there are limitations on several levels. The earth has about as much land as we’re ever going to get, and it costs a lot of time and money to develop land into usable housing. Local governments restrict the use of land, instead releasing it for residential development over a long period of time, which tends to fall behind the pace of population growth at times. There is a general trend for people migrating towards cities, whereas new land is only available on the outskirts, or by intensification of land use.
Demand is more complicated. It’s far harder to measure than supply, and has more factors to consider.
Population has consistently increased in New Zealand since the British first colonised the country. Not only do we have more births than deaths, but we also have more immigrants arriving than we have leaving.
The price of property affects demand because as it becomes more expensive to own property, less people are inclined or able to purchase it. Do consider there are four factors that affect the true affordability of property. It’s not only the purchase price, but freedom to access lending, the cost of paying it back, and how much buyers have in the first place, in terms of assets and capital. This is why monetary policy is such an effective weapon which the government can use to control values via interest rates and banking regulations.
Rent prices affect affordability to investors, so could be considered the fifth factor in affordability, but as it’s also a measure of investment return, I think it deserves its own category. Unsurprisingly, if rents go down, you can expect a similar, though often less significant, impact on demand.
Alternatives also influence the level of demand, as the pitt two or more things against each other in competition. Just like the mere existence of Fanta must reduce the demand for Coke, people can choose to rent instead of purchasing. Historically rent is considered the cheaper alternative, but at times when interest rates are particularly low, expect more of those renters to consider buying a place of their own instead.
Property Buyer Confidence
Outside basic rules of supply and demand, possibly the biggest unknown, impossible to measure influence is buyer confidence. There is an argument that when a market is running too hot, over confident buyers push prices beyond their true value, creating a ‘housing bubble’. The bubble bursts when confidence is removed, leading to a ‘correction’.
This all boils down to a simple fact. Until there is more land and housing than people willing and able to buy it, there will be upward pressure on prices. There are more and more people competing for ownership of land in our main centres, of which there is a finite supply.
While there are a number of influencers of demand – interest rates, rent prices, etc – population is the one to watch.
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