If you’re a property investor, then successfully navigating the economic landscape and understanding how economic factors have an impact on your investments is a must.
Understanding how conditions fluctuate will give you opportunities to capitalise on downturns and plan ahead. Property values are intrinsically linked to various economic factors like interest rates, employment trends and GDP growth.
A breakdown of some of the economic factors impacting the property market
Interest rates are probably the best-known factor impacting the property market and investment strategies. When interest rates are higher, buyers are put off by the higher repayments that they will have to make, and spending power is limited, with buyers being granted lower loans by the banks. Lower interest rates, on the other hand, increase the attractiveness of real estate investment in all sectors.
Growth in the economy supports higher property prices as buying power increases. Excessive growth, on the other hand, can lead to rate hikes, which in turn cool demand. In a similar vein, the higher inflation is, the more disposable incomes and savings are negatively affected. This has a particularly noticeable impact on first-time buyers and rental yields.
Another impact of strong economic growth is an increased demand for commercial properties such as office spaces, retail spaces and industrial properties. This can result in higher occupancy rates and rental income for property investors.
High unemployment rates can lead to decreased demand for both residential and commercial properties. Conversely, low unemployment rates can stimulate demand for investment properties as more people have stable incomes to support housing expenses and homeownership.
The impact of supply and demand in the property market should not be underestimated. Rapid population growth in an area can lead to increased demand for housing, which in turn leads to higher property prices. On the flip side of the coin, an oversupply of properties in a market with stagnant population growth can lead to lower property prices.
An example of supply and demand in action can be seen in the City of Cape Town. Property prices have been rising from strength to strength in and around the city, and census data shows that Cape Town’s population has grown by 27.6% since 2011.
Economic trends can also influence consumer confidence, which can have an impact on the willingness of individuals and businesses to make long-term financial commitments such as purchasing or leasing properties. Conversely, high consumer confidence generally leads to increased investment in the property market.
Key factors that drive the property market
An often-overlooked factor that can affect real estate pricing and the types of properties in demand is changing demographics. For example, if young families started moving into a suburb traditionally favoured by retirees, there would be an upswing in demand for houses with gardens and extra bedrooms. This upswing will naturally lead to an increase in the price of such properties.
The general health of the economy will have a profound impact on real estate transactions. The general health levels of an economy can be ascertained by looking at factors like GDP, manufacturing activity and employment data. Factors not in South Africa’s control, such as climate change and ongoing conflict in the Middle East and Eastern Europe also have a marked impact.
If you’re considering adding to your property portfolio, the widely experienced team from Seeff can help you navigate the prevailing economic trends and make decisions that will benefit your investment portfolio in the long term. Get in touch today for further information and advice.
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