Main factors affecting property prices

Many of the people who buy property for the first time, as well as experienced investors, focus on the functionality and style of the offerings, expecting these features to lead to a higher property value. Many of them forget the so popular formula for success in the commercial real estate sector – “location, location, location,” writes Investopedia.

However, physical structures depreciate over time. What increases in value is the land beneath these structures. This is a significant difference given that buying a home is the single largest investment that most small investors would make throughout their lives. The inability to view their home as an investment and understand the factors that determine its value can limit the opportunity to increase wealth.

Land as an appreciating asset

Making a distinction between the property and the land on which it is built may seem trivial, but once investors focus on these differences, they will be able to find more effective investments that generate the highest return given the risk or invested capital. Since prices are a function of local demand and supply, the appearance, functionality, and maintenance of the physical structures certainly influence the value, but much less than most people think.

The reason why land is becoming a more expensive asset is simple. The supply of land is limited and no one produces it. The demand for land constantly increases with population growth, and since the supply is limited, the price of land should increase over time, unless something happens to reduce the demand in a certain area or make the land unusable.The question is how much the land will become more expensive and how the value of the improvements made on it will change. The physical structure of the property is an asset that depreciates. With its aging, it requires capital investments for maintenance, renovation due to moral obsolescence, or for maintaining the style.The degree of depreciation or moral obsolescence is specific to each property, but it is fair to say that if the property is abandoned, it will continue to depreciate until it no longer adds value to the land or even decreases it.

Once they understand the impact of land value on the overall value, the market mantra “location, location, location” seems more appropriate. The conclusions are that buyers should look beyond the physical attributes of the property and focus on how its location will affect overall returns.

However, even the most inconspicuous purchases can be improved over time and create significant wealth if located in a high-demand area. Here are a few aspects that potential buyers should consider:

Smaller or less attractive properties can offer higher investment returns

Let’s take two houses as an example, located on comparable plots in the same neighborhood, one in the upper price segment for houses in the neighborhood, and the other half the price of the first one. Since local demand and supply determine the price of land, the houses in the neighborhood will increase in price at approximately the same rate each year. If, as a result of the increase in land value, the expensive house increases its value by 10%, then the cheap house will increase its value by 20%. The example is naturally very conditional, as all other factors are isolated.

Locations within the neighborhood affect the price of land

Due to limited traffic and therefore greater safety for children, locations in secluded streets are usually more sought after than houses on busier streets.

The average age of neighbors can be a key factor in property appreciation

Buyers who have young children often avoid places with an older population, which will not allow their children to have social contacts. In addition, most homeowners are aware of the impact of certain educational institutions on the demand for housing in the vicinity of the school. Since the housing in the area is not homogeneous, the increase in price will be entirely due to the location and value of the land.

Future constructions may change the value of your property

Owners should take into account not only the current conveniences, but also the future business and government projects in the area. Government plans regarding schools, hospitals, roads, and other types of public infrastructure will equally affect the value of the property, as well as the current and future construction of commercial properties and facilities.

Author: Stanimir Stankov / VIP Clients Manager, New Home 1 / tel.: 0894 555 690

Photos: Freepik

Stanimir Stankov, Manager of New Home 1

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