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What causes prices of real estate to appreciate?

Monday, April 10, 2017
By Anil Pharande

ANIL PHARANDE
Chairman, Pharande Spaces

Real estate investors are always keen to buy a property when they know that it will gain in capital appreciation - but it is not only property investors who are attracted by this phenomenon. There is also greater interest from end-users for buying rather than renting homes, since real estate appreciation means that their asset becomes a greater source of financial security going forward. Appreciation also opens up the possibility of selling the first property and buying a bigger and better one should the need arise - which it usually does as a family grows.

So, what is it that makes residential property prices increase in some locations? The phenomenon of capital value appreciation or growth of a property’s market value over time happens because of various factors, including:

  • The supply and demand dynamics of a particular location
  • How fiscal inflation is behaving
  • The interest rates banks charge for home loans, meaning the cost of borrowing
  • The development of new infrastructure or other new real estate market drivers such as schools, shopping malls, airports or increased public transport facilities in a particular area
  • Growth in local population, leading to increased demand

Demand And Supply: When there is increasing demand for homes in a certain area, property prices go up if the amount of residential real estate projects being built to meet the demand is not catching up fast enough. In other words, people buying homes for their own use (end-users) are willing to pay more for a home because living in that area is attractive and desirable.

Fiscal Inflation: Inflation is caused by excess money being in circulation, which essentially causes the value of money reduce. When this happens, the prices for a lot of things rise, the cost of land, construction materials, construction labour and statutory building permits. Of course, inflation will not result in increased property prices in an area if the location itself is deficient - meaning that it has poor accessibility and social and civic infrastructure, or if it has seen an oversupply of residential projects already.

Cost of Borrowing (Interest Rates on Home Loans): The upward or downward movement of home loan interest rates has a direct correlation to real estate appreciation. When the cost of borrowing increases, the demand for homes slows down because fewer buyers can afford the higher EMIs. Likewise, when home loan interest rates decrease markedly, affordability increases and market sentiment improves, leading to higher demand for residential property purchase.

Property Market Drivers: With specific pertinence to residential real estate, the term 'market drivers' refers to all and any developments in an area that positively impact the desirability and convenience of living there. These can include:
The development of new office complexes in the area
The arrival of a shopping mall or hypermarket there
The proximity of educational institutes and hospitals which reduce traveling time to such important establishments
Zoning regulations in an area that prevent excessive development from happening to cause further densification, thereby preserving the available open spaces, greenery and overall ambience of the location. This is particularly true in integrated townships
Public transport facilities which ensure that the location is accessible by road, rail or even air
Any new infrastructure projects which boost the overall quality of living in the location, such as flyovers to reduce traffic congestion, water reservoirs, etc.

Population Growth: The growth of population in a location obviously results in increasing demand for housing there. Increased demand directly translates into faster appreciation in real estate prices.

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