There are various reasons why property prices increase and decrease and most often it is depended on where a country is in relation to the property cycle. Most people recon that what goes up must go down, and it is up to consumers to predict when the most suitable time is to sell or buy. Here are some reason to explain what factors determines property prices.

1. Economic Growth and Unemployment

The recent economic downturn showed the world to what extent the economy of a country could affect its property prices. It is also a fact that high unemployment levels in a country will have a negative effect on house prices. On the other hand, when a country experiences good economic growth it is most likely that wages/salaries will increase meaning consumer have more disposable income to spend on property. This will lead to a bigger demand, which might mean higher property prices.

2. Interest Rates

When interest rates are low, consumers tend to lend money easier and buying property becomes an easy decision. However, when the interest rate rises, homeowners are sometimes force to sell, as they can’t afford the monthly installment on their bond. High interest rates also discourage potential buyers to purchase property because of high monthly installments.

3. Consumer Confidence and Market Sentiment

They way consumers feel about the property market has a big influence on how reluctant they are to buy property. Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. Market sentiment on the other hand refers to the general feeling or mood of the investment community as to the anticipated price movement of the property market. If consumer confidence is low and market sentiment appears unsettled, the demand for property will drop along with property prices.

4. Banks’ Lending Criteria

When a country is experiencing a property boom, it is most likely that banks will relax their lending criteria meaning more people will qualify for a bond. This will lead to high demand and property price will most probably rise. However, with the recent credit crunch, banks had extremely strict lending criteria meaning less people qualified for a bond. This lead to a drop in demand and evidently a drop in property prices.

5. Demographic Factors

Factors like divorce rate, life expectancy, increase in immigration and population growth also have an influence on a country’s property prices. These factors are sometimes influenced by economic growth, politics etc.

6. Location

As expected, the location of a property has a great influence on the price. In most country’s urban properties are more expensive as the demand is high. Other location factors that influence the price of property is its proximity to schools, train station, noisy pubs and bars, industrial areas etc.

It is important to note that all of these factors are in some or other way related and also influence each other. For example, if banks relax their lending criteria and interest rates decrease, but consumer confidence is low, property price will stay the same until demand picks up.