Is it possible to value a property without studying and understanding the surrounding economic factors? The answer is no, as economic factors have a significant impact on property prices and market value. Therefore, real estate valuation requires a clear understanding of all economic variables such as inflation, economic recession, and others. In this article, we explain the impact of the economy on real estate prices and its relationship to real estate valuation.
What are the factors affecting property value?
Many factors influence real estate prices, and the most important of these are economic factors, as the real estate market is affected by growth or economic recession, such as:
Supply and demand:
The most important factors affecting real estate prices. When demand for real estate exceeds supply, competition increases and there is a shortage of available properties and offers, thus increasing real estate prices. Conversely, when demand for real estate decreases, options increase and prices decrease. Supply and demand are affected by many factors, such as economic changes. For example, with the growth of the Saudi Arabia economy, demand for real estate has increased. Immigration, urban expansion, and other factors also affect real estate prices.
Inflation:
It affects the economies of countries, not only in real estate but in almost all commodities. This affects real estate as the amount of money circulating in the market increases, causing money to lose its purchasing power and leading to higher prices. Many people resort to preserving the value of their money in assets, as real estate is the safest investment, which increases demand for real estate and raises its prices.
Bank interest rates:
It contributes significantly to the rise in real estate prices. When interest rates are low, real estate financing is easier and cheaper, which encourages investors to borrow to buy property to sell later and make a profit. When interest rates are low, this reduces borrowing opportunities, which reduces demand for real estate and causes prices to fall or stabilize.
Economic fluctuations:
Periods of economic growth and recession contribute to determining real estate prices. During periods of economic growth, when gross domestic product rises, employment opportunities increase and income levels rise, demand for real estate increases as a result of improved purchasing power and investor confidence, leading to a significant rise in prices.
During periods of economic recession, economic activity declines, unemployment rates increase, and spending levels decrease, which negatively affects the real estate market through a decline in demand and an increase in supply, and thus a decline or stabilization of prices.
All these economic factors have a clear and direct impact on real estate prices, whether rising during periods of recovery, as happened in the Saudi Arabia economy thanks to Vision 2030, or falling during economic recessions. Therefore, investors must be aware of all these changes to make informed decisions about real estate.
What is the benefit of a real estate valuation?
After discussing the most important economic factors that affect property prices, you may be wondering why it is important to understand these factors and why the state of the property market is one of the most important factors considered by property valuers.
- Determining a fair price: A real estate valuation helps you determine a fair value that reflects the market reality of the property, based on supply and demand and the surrounding economic conditions. This protects you from overpricing or underpricing the property. A fair valuation strikes a balance between the interests of the seller and the buyer according to the market situation.
- Assistance in making a purchase decision: A real estate valuation provides the buyer or investor with an impartial reference point for the market value of the property. This helps in making a purchase decision and taking advantage of opportunities, especially with the ability to compare the property with other offers on the market. It also protects the buyer from paying more than the true value of the property.
- Ensuring return on investment: Valuation is an important step in determining the feasibility of purchasing a property for investors, especially if the goal is to rent or resell. Valuation helps them calculate the expected return, compared to market fluctuations, inflation, and bank interest rates, and thus make investment decisions based on a realistic analysis of returns and risks.
- Real estate financing: Banks and financial institutions rely on real estate appraisal to determine the amount of financing. The market value of the property is used as collateral, through which lenders assess the security of the loan. An accurate valuation reduces financing risks and speeds up the approval process.
In conclusion, studying economic factors is important for a real estate valuer to consider when conducting a valuation. This shows the relationship between the economy and real estate prices, as the economic situation has a significant impact during both periods of growth and recession.
If you need to buy a house, obtain real estate financing, or make any investment decision. Request a valuation now from Aain to get an accurate insight that will help you make an informed investment decision and protect you from unexpected risks in the real estate market.