Let’s start by looking at the connection between the real estate market and various economic conditions, and how the timing of economic cycles can influence property investment decisions.
The state of health of the economy has a direct impact on real estate activity levels. The fallout from a struggling economy in one location is reflected in rising unemployment – this will generate a population exodus to areas of better employment prospects and reduce demand for real estate in the area where the economy is failing.
As confidence returns and the economy picks up, this population movement can be reversed and housing demand increases. Wage levels can also have a bearing on house prices and dwelling activity. When earnings rise, there is a prospect of the higher wage levels resulting in more demand and thus higher house prices, however there are usually many other factors at work.
The availability of funds for housing will reflect increased demand and higher numbers of home loan approvals. With growth in loan approvals comes higher turnover of housing stock, and potential for upward movement in house prices.
Ultimately, price levels represent an investor’;s capacity to meet the market, and if credit is available and interest rates are low, the market flourishes and prices move higher.
A direct relationship between interest rates and property prices seems obvious but the connection is not as strong as you may think. House prices often continue to increase when interest rates are significantly above average as other elements in the equation such as population growth, substantial wage rises and general market confidence can combine to push prices up.
If construction costs rise appreciably, the valuation of existing housing stock may be increased in line with the higher market entry costs. In terms of timing, as the economy moves through boom and bust cycles, real estate buying and selling opportunities will emerge. In upturns, as property values increase and finance is easy, some owners will take advantage of inflated prices and sell.
During a downturn, with prices level or falling, often lower interest rates and rising unemployment, an astute investor will take advantage of bargain prices.