Moving the Real Estate Market - Part 2
The Factors That Influence Real Estate
We've talked about the fact that real estate represents a major portion of the wealth of most people, especially in the US. The fact that the market is so huge makes it an inviting sector for investors, especially since the estimated value of the entire market is around $20 trillion dollars.
Demographics...
There are essentially four factors that influence real estate. In our previous article we talked about demographics, which are statistics based on data that describes how a population is made up by breaking it into segments such as age, gender, income, number of children and other information. When looking at demographics we are able to ask pertinent questions about the future of real estate - retirement homes, holiday condos, and downsizing - they are all affected by demographics.
...And Interest
Then we talked about interest rates and the impact they have on the real estate market. When you are investing in the market, then interest rates play a different role than they would if you were purchasing a residential property. When it comes to equity investments the interest rates relate differently. When the rates go down, the value of the investment increases and conversely, when the rates go up, the value of the investment decreases, as it does when investing in bonds.
Now It's the Economy
The other factors affecting real estate investments are the economy and government policies and subsidies. The overall health of the economy plays a major role in the value of real estate. The economy is measured by indicators such as the gross domestic product (GDP). The GDP represents the total dollar value of all goods and services produced over a period of time. It is basically the size of the economy. Other economic indications taken into consideration are employment data, manufacturing activity, the prices of goods and things of that nature. The bottom line is that if the economy is slow, so is real estate.
How this plays out is through the effects of the cycles of the economy on the various types of real estate. For example, let's compare office buildings to hotels. Hotels are affected by a downturn in the economy because people tend to spend less and use the hotel services less when the economy is sluggish. Office buildings, on the other hand, have to maintain a presence regardless of the economy. Office tenants usually have a longer-term lease agreement for the space whereas a person renting a hotel room may not do so because the economy isn't great for travel and spending. It is wise to be apprised of the cycle the economy is in and to understand the sensitivity of real estate property to the economic cycles that take place.
Let's Talk About the Government (Doesn't Everyone?)
The last factor we will discuss is the effect of legislation on property demand and property prices. The government has the ability to boost the demand for real estate by offering perks to make it more attractive. Tax credits, deductions and subsidies are included in the bag of goodies the government is able to offer to encourage real estate activity. False trends tend to come out of this sort of expenditure by the government, so being aware of the government incentives as they become available can help an investor know what is really happening and what is false advertising or plumping up the market. The illusion of tax credits or other incentives to increase home sales is just a ploy to jump-start a bad economy. The fact is that housing demands don't really go up; people just think they're getting a good deal and fall for it.
Choose Your Path
So then, what's the best way to invest in the real estate market? That's up to the investor. An investor can purchase physical real estate or invest indirectly through managed funds. Since indirect investment has lower costs and lower capital requirements, many investors decide to go that way.
Even though it all looks relatively straightforward, the fact of the matter is that there are a number of variables and in actual practice the results can be very different. But, if you have a handle on the basics, you will have an advantage when it comes to evaluating a potential investment.
