Five Must-Know Real Estate Market Drivers

Five Must-Know Real Estate Market Drivers

Reading time: 5 minutes

Real estate is driven by various factors, including the size of a population, overall economic performance, market trends, and interest rates. In addition to demand, supply-side aspects can also affect the ebb and flow of the real estate market.

Unsurprisingly, the state of the real estate market frequently makes the news headlines, and its size and the lucrative opportunities it can present make understanding the key issues driving this market worthwhile.

1. The Economy

At its centre, the housing market, like most things, is affected by the economic landscape.

A softening economy – weakening real GDP (Gross Domestic Product) – and falling incomes bode poorly for housing. Affordability further suffers during recessionary periods that involve high unemployment and interest rates. Unfortunately, job loss, mortgage arrears, and, at the extreme, individuals having their houses repossessed are part and parcel of an economic downturn. Inflationary periods can equally be particularly difficult for the real estate market given increased construction materials and labour costs, rising property prices, and fewer buyers, consequently influencing demand.

Conversely, real estate investment increases during periods of steady growth and lower interest rates; these economic conditions encourage lenders to lend and prospective homeowners to buy as disposable income tends to increase. This, in turn, boosts demand for housing and can lead to increased housing prices.

2. Interest Rates and Mortgages

Rising interest rates are seldom good news for the real estate market. The increased cost of borrowing makes it difficult for first-time buyers to get on the housing ladder and makes it more expensive for existing property owners to remortgage. Increasing interest rates can also drive up rental demand, eventually resulting in higher rental prices. In the US, rental prices have gone up at a time when interest rates have risen significantly in recent years and remain at their highest in two decades. According to Rent.com, the median monthly rental price is $1,987 per month and has seen a +0.77% increase year on year and a +0.30% increase month to month, as of June 2024.

Lower interest rates, however, can boost housing demand and encourage house purchases, as it can sometimes be cheaper than renting.

3. Housing Supply

The property market is not immune to the Law of Supply and Demand.

Housing availability can affect the real estate market, which goes back to the law of supply and demand. An excess supply of a good, keeping all else constant, will cause prices to fall as supply outstrips demand. To sell a property in this type of environment, one would likely have to lower the asking price (all else equal). However, excess demand for housing and limited supply might cause the price of real estate to vastly increase as buyers bid higher than asking prices to secure a property.

4. Government Policy

Government incentives and subsidies are one of the key drivers behind the real estate market.

In the UK, during COVID-19, housing prices dropped significantly following the onset of the pandemic but swiftly made an abrupt turnaround and reached fresh record highs in late 2020. The upturn was largely triggered by financial government support for businesses and households. The UK government also launched what was known as a ‘stamp duty holiday’ in mid-2020 to underpin the falling property market, which helped push prices higher. Another example was seen during the financial crisis in the US: the government had introduced first-time home buyer assistance to bolster home purchases.

5. Geographical Factors

Location, location, location!

There is no doubt that location influences the real estate market. An average build positioned in a lucrative area might be a profitable investment and, therefore, command a high price, whereas a property of high standard in an undesirable location can weigh on its price. A property’s appeal might also be driven by its proximity to hospitals, schools, and public transport, in addition to demographics, such as age, household size, and income.