At some point, you have probably wondered why the value of real estate always goes up. Whenever it crosses your mind, you might think that it is because of the high demand for real estate properties.
In the law of supply and demand, prices will rise if there is a high demand for a product or service but low supply in the market. Conversely, if there is a low demand but more supply, prices will fall. This is also true for the real estate market. Many people tend to buy properties as time goes by. Thus, many property developers build more to meet the rising demand of the people.
However, these properties take time to complete. And due to this, property prices rise because the available, completed properties are not enough to meet the demand as quickly as possible. Now, you might ask: what causes the demand for properties to go up?
There are several reasons that make the demand for properties increase.
But the common reasons that most people know is because of overpopulation and immigration. Those can be potential factors. However, in the general sense, they do not represent to be the only reason for the soaring demands of properties. It can also be due to the financialisation of the housing market.
As defined by the InvestorWords, the housing market is the “general market of houses being purchased and sold between buyers and sellers either directly by owners or indirectly through brokers.”
Meanwhile, financialisation of the housing market happens when the financial institutions, such as banks, keep on lending money to people so they can afford to buy properties. To put it simply, the demand for properties still depends on the financial sectors’ decision of how much money they are willing to lend.
Anyone who can meet the qualifications and requirements of a certain financial institution can get a mortgage or loan to purchase a property. For most people who cannot afford a house based on savings, this is a practical way, as they can pay back over a long period of time.
So, how does financialisation affect the property prices?
The value of properties tends to increase if more people are capable of getting a loan or mortgage from financial institutions. When there are plenty of lending banks and building societies willing to provide attainable terms, more people will buy a house.
Typically, banks also influence property prices when they set the key interest rate in the economy. If the interest rate is low, the cost of borrowing to purchase a house is likewise low. This circumstance can also encourage more people to borrow money, resulting in higher demand. Hence, the higher the demand is, the higher the prices will rise.
What determines how much banks will lend?
Usually, banks determine the amount of loan they will provide to a borrower based on some of these factors:
- Status of the economy in general
- Governmental support
For banks, they are more likely to lend out mortgages because they are less risky than other types of loans. It is because if the borrower failed to repay, banks have the right to take back the property as the collateral.
Another Fundamental Reasons of The Property Price Increase
The demand for housing may increase if there are more single-person households. It means that in one property, there is only one person who lives in it. Another factor is the acquisition of many properties by only one person. These events will affect the growth of the demand for properties, hence rising the house prices.
The property prices will also change and soar high if there are fewer houses built, but there are more people who need it. When the supply of houses is low, people tend to compete by increasing their budget for buying a property. They often provide more money they are willing to spend to win over their ideal house.
Housing bubbles can also be a reason for rising house prices. The housing bubbles occur when house prices have soared higher just because people think prices will continue to increase. People will experience exuberant spending to the point of collapse. When the demand finally decreases or stagnates while the supply increases, typically, the house prices will fall sharply – thus, the bubble bursts.