House prices refer to the value of a property, but the price of the house does not always directly reflect the actual value of the home. For example, if a homeowner needs to sell their home urgently, they may be forced to sell their house at a price that is less than the property’s actual value.
What drives house prices? The inherent value of a home refers to factors such as the quality of construction, the architecture and the landscape. However, the actual market value can depend on a number of other factors. Direct factors affecting house prices include:
• Community
• Neighborhood
• Schools
• Amenities
• Transportation
• Zoning and planning
There are also a number of indirect factors that influence house prices. Indirect factors include:
• Economic changes
• Demographic changes
• Disasters
• Perceptions
House prices fluctuate according to business cycles, interest rate changes, GDP growth, inflation and a number of other economic factors. Like so many economic trends, house prices are often cyclical in nature, often running deeper and longer than other economic cycles. In the 20 years before 2007 to 2008, house prices cycled upwards and interest rates were very low. People bought houses that they couldn’t really afford, before interest rates spiked dramatically and the market crashed.
Research by two economists, Robert Shiller and Karl Case revealed that house buyers pay more attention to how house prices have changed recently rather than focusing on other fundamental economic factors. This means that low interest rates increase the willingness of people to purchase property.
Overall, the research by Shiller and Case uncovered some major trends in house prices and house buying:
• When the economy is strong and growing, the demand to buy houses and property increases.
• If interest rates are low, people will feel encouraged to buy property.
• The housing market becomes more volatile when floating rate mortgage market structures are put in place.
• House buyers are more concerned with and influenced by the movement and trends of recent house prices, meaning that cycles is house prices are evident and significant.
Useful tip: you can estimate your house price using an online calculator such as MSN Real Estate’s home valuation tool, powered by Realtor.com.
