How House Prices Are Determined (Part 3)

House Prices – Supply and Demand

There are some major factors that affect the supply of private property—the current supply and demand for real estates, the cost of construction and infrastructure, the anticipated future demand, the availability of land and financing, and conditions in the economy. Developers are also aware that it takes a minimum of a year to complete a project and schedule their work accordingly.

Those who build apartments assume a greater risk, because it may take several years to turn a vacant lot into an apartment complex. However, they often rely on the leading indicators of future demand for housing, including the availability of government grants, interest rates, and vacancy rates.

Housing from the developer’s perspective
Developers often become cautious if the cost of building materials is high or the cost of labour increases, because this means that the price of any new properties they build will go up, and they are only willing to proceed if they feel that perceived demand on the part of the consumer is high. This indicates that prospective home buyers will be willing to pay more for what they want.

Developers are often expected to bear the expense of any new infrastructure a development requires, including roads, lighting, kerbing, and sewage and water pipes, and these expenses are passed on to the buyer, which also increases the price of residential property.

In many states, infrastructure costs and developer levies mean that adding to the housing stock is no longer financially viable. Because of this, some state and local governments are willing to work with builders to find solutions to the problem, support the construction of new housing, and keep property prices at a reasonable level.

Prevailing economic conditions
In today’s economic downturn, it is more difficult to finance the construction or purchase of property than it was in the recent past. Developers will tell you that banks seem to expect a 25% to 30% return on their investment. If someone wants a loan to buy an existing property, 5% to 10% is considered to be sufficient. Also, banks no longer permit builders to capitalise interest, while in the past this used to be standard procedure, and interest rates have also increased dramatically over the last two years.

Feeling the pinch, many builders are saying that although they are ready, willing, and able to build, the land that is now available for building is insufficient, and this automatically limits the housing supply. As a result, the price of property goes up, and homes become increasingly unaffordable for many people.

Technically, the New South Wales (NSW) economy has been in recession in recent months. Because of this, builders and developers in NSW have hesitated to undertake any new housing projects, By way of contrast, the South Australian, Victorian, and Queensland economies are in a much healthier state, and this is clearly reflected in the building activity taking place in those areas.

When consumers feel unsure about the economy, they also become more cautious about spending money, and businesses react in the same way. Builders and developers hesitate to begin new projects and buy land, the supply of property is restricted, and this increases the price of housing.

If you, as an individual, become familiar with the various factors that affect the supply and demand for real estate, you will be better-prepared for the opportunities that present themselves than the average consumer. Ideally, wise investors are prepared to buy before prices go up, and sell before they start to come down. This enables them to maximize their profits and minimize any losses they may suffer.

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