Why do property values appreciate?

Have you ever wondered why the real estate prices of certain areas appreciate at a high speed while the prices in some areas keep crawling? In many cases, an area may be witnessing stable property rates while at the same time, a neighbouring locality would be witnessing doubling or tripling of prices.

Real estate investors buy properties in order to increase their cash flow, which is only possible if the capital value of the property too appreciates. Therefore, an investor should have a clear understanding of the various factors that increase the property value, through which he/she will be capable of choosing more profitable properties to invest in.

It has to be noted that there are several factors which lead to appreciation of property prices in an area. Here are some of the major and common factors that influence the property prices. Some of the factors listed below are even interrelated and therefore, the investors have to analyse a mixture of these factors before finalising where to buy properties.

Housing supply and demand scenario

The basic economic fundamentals of demand-supply analysis are applicable to real estate too. Like in most of the cases, increasing demand and reduced supply in real estate gives way to appreciation in property prices. If the demand for properties is high in any area, then the prices of the housing units in that area would also rise. If the demand-supply ratio is adequate and matches with the demand for housing units, then the prices remain mostly stable.

However, if supply is slightly higher than demand the prices may not necessarily drop, but may remain constant. But if the demand is less while housing units are available in abundance, then the prices would likely fall.

Increasing population

It is very obvious that with an increase in population of an area/city, the demand for residential properties also increases. This consequently paves way to appreciation of capital value of properties.

Job opportunities

The entry of industrial areas, IT parks, SEZs, shopping malls, educational universities, etc create numerous job opportunities. With the job base in a micro-market growing, it attracts more and more workforce to the market, thereby increasing the demand for properties.

In this context, which type of properties is mostly in demand depends on the kind of jobs available in the market. If there is a rise in IT jobs, the demand for mid-income and high-income properties would be rising and if there is an industrial hub being set up, then the demand would grow for affordable and low-income housing. The increase in availability of high-paid jobs would result in an increase in demand for luxury properties.

Betterment of micro-market

The factors involved in the betterment of a micro-market include social & physical infrastructure, connectivity, proximity to public transport, commercial outlets, access to basic facilities, proper maintenance, development potential of the area, safety and security, and so on. All these factors influence the demand for real estate properties in the micro-market.

A town or city with better infrastructure is likely to witness greater real estate demand and investors often know how to take advantage of the market.

Good marketing

At times, the way in which a property is being marketed catches attention of a growing number of buyers. The influence of media and promotion may result in faster appreciation of properties. Thus, a clever marketing strategy is also a reason for appreciation of property values.

Sometimes, artificial demand is generated in areas. For instance, if there is a proposal of a new airport or metro coming up in future, the developers and brokers of the nearby areas start buzzing around. As a result, the demand starts growing even though the level of development is very low in that place and it may start witnessing higher property prices compared to other developed markets.

Inflation effect

Inflation is an effect of increased amount of money in circulation. The value of money drops when the supply of money increases and due to this, the prices of various commodities and services go up.

However, inflation alone cannot always cause appreciation of property values in an area if the area lacks good infrastructure, easy accessibility or faces oversupply of housing units, no proper upkeep, rise in crime rates, etc. But however, as an effect of inflation, other costs for land, construction materials, labour, legal building permits, etc are likely to rise, and as a result of this, the property price would also rise.

Home Loan availability and interest rates

The availability and interest rates of home loan also influence the price of properties as many buyers depend on bank loans nowadays. In case of properties located in unauthorised areas, reputed banks will not approve the loans. While home loans are easily sanctioned for localities which have clear titles and are legally correct.

A decrease in interest rates charged on home loan increases the affordability of buyers and further increases the demand for properties.