Have you ever thought about the reasons for the changes in property prices? In this article, I will go throught the main causes for the property prices´ shifts. How do I know this information? Because I have been a Toronto professional realtor for over 25 years.

Watching the trend

How the next price move can be predicted? How does one determine when it is best to invest? The majority of buyers will keep their eyes on the previous direction of prices. To say it differently, what buyers expect is mostly affected by previous movement. If the prices rise they expect the growth to continue, and vice versa. Unfortunately, this method has no bearing on important factors that influence the price, yet it is practiced. Relying on this method alone can produce very painful experiences, just as we saw not too long ago.

Fundamental economic factors

Which economic factors in principle is then responsible for making the price?
- Economic growth
- Nominal interest rates (before inflation) and structure of mortgage products
- Inflation
Let’s look at these factors in more detail.

Economic growth

Strong economics is very important for just about any business out there and real estate is no exception. One reason is that strong economics will positively push up the prices of property as it reassures buyers that the demand for housing will keep on growing, their property will increase in value and they will be able to make profit when passing it on again. In accordance with BIS Quarterly Review, 1% of GNP increase is connected with 1% to 4% property price rise after 3 years.

Nominal interest rates and structure of mortgage products

What is most needed for property prices to go up is eager buyers. As a result of the fact that many people can not buy a property without some sort of house lone, almost all buyers are eager to instead buy houses when there are attractive mortgage products with low nominal interest rates. According to the mentioned source, a 1% drop in the nominal interest rate can be linked with 1/2% to 1% rise in property prices after 1 year. Similarly, buyers get easily influenced by the smallest increase in the nominal interest rate which in reaction causes a settling of property prices. Be careful though since no rule should be strickly interpreted. To give an example, a credit crunch is the situation that appears when offical interest rates start to get less important and the loan market falls under the influence of the different factors. Likewise is the real estate market.

Inflation

Property prices are strongly affected by the rate of interest while changes in interest rates are influced by inflation. High inflation has a different impact in different countries. In such countries, where investing in property is perceived as balancing the inflation, higher inflation in fact rises the property prices (Germany would be a good example). A typical characteristic of these type of countries is the fixed interest rate loans without any equity withdrawal. Some countries see the negative impact of high inflation on property prices such as in UK where the interest rates float and in the USA that has interest rates with equity withdrawal.

Conclusion

Rules can not always be strictly applied and numbers and values may not always have any bearing on your disctrict. It is realtor's business to see the exceptions and differences. However, it is important to note that a general system is used through which real estate prices are created on the market. Don' t be caught by a lack of attitude. It is necessary to take in all aspects connected with the market.