Factors influencing realty price appreciation

Real estate investors generally invest in property with the objective of earning healthy returns in future from the property they have purchased. So, what causes prices to increase in an area? Price appreciation or increase in prices, which is a key concept behind real estate investment. Price appreciation is the enhancement in the value of a property in future. There are different factors that cause price appreciation, which may be dynamic as well as specific to a particular project.

Some of the general factors that cause price appreciation of property in a a particular locality or area are:

1. Demand and supply dynamics of a particular locality or area:

Property prices generally increase when there is an increasing demand for residences in that particular area. Prices may also increase if the number of residential real estate projects is not catching up with the supply. Besides, end-users may be willing to pay more for a property if they find the location to be desirable. There are many investors who buy property in an area where the demand is high so as to sell it at a profit when the supply is low. This results in further appreciation in prices. Hence, the ideal time for end-users to purchase residential property is when the supply is greater than the demand, in areas which have a high potential for price appreciation.

2. Inflation:

Inflation is another key factor which causes realty price appreciation. Inflation is generally caused due to an excessive amount of money in circulation, which over time causes a fall in its value. This results in an increase in prices for a number of goods and commodities. This causes a spill-over effect on the realty market as well, leading to the increase in price of goods and service related to the realty industry. The include increase in prices of land, building materials, labour, building permits as well as other associated materials.

Even though inflation plays a major role in price appreciation, it cannot be considered the only reason for the rise in prices. Inflation would not contribute significantly if the area has poor accessibility, inadequate infrastructure or if there is an oversupply of real estate projects in the area.

3. Home Loan interest rates:

Home loan rates have a direct bearing on the demand and thereby the realty price appreciation of an area. An increase in home loan interest rates results in a decrease in demand for residential property. This is because there will be fewer buyers who will be ready to bear the additional amount charged by banks by way of interest. Contrary to this, when there is a decrease in interest rates there will be increased demand for residential property due to the affordability factor.

4. Real Estate Market drivers:

Market drivers of an area are the various developments that enhance the livability quotient of the area. This indirectly leads to an increase in demand for residential property and thereby to an appreciation in prices. Some of these market drivers include:

• Establishment of an employment hub like an IT park or an office complex.

• Coming up of an shopping mall or a multiplex.

• Zoning regulations that prevent the construction of many projects, thereby facilitating the provision of more open spaces and greenery.

•  Excellent transportation facilities making the area more accessible through road, rail and air.

• Physical infrastructure facilities like dedicated water and electricity supply, roads, bridges, flyovers, foot paths, parks, play grounds etc.

• Social infrastructure facilities like schools, colleges, health-care facilities, restaurants, banks and other public utilities.

5. Population Growth:

The growth in population of the area also results in an increase in demand for residential property, thereby leading to an appreciation in residential realty prices. The primary contributor towards the growth in population is due to the migration of people from other parts of the country for education, employment as well as for business purposes. Besides, there may be many people who would consider buying a second home in the area due to the advantages that it offers.