Home Value Appreciation

[ahmadjee]

What are the economic & social factors that make the home value to appreciate? I understand more demand of a particular area of living will probably increase the property values but are there some other factors that effect it also? Like the economic strength of the area, city or region, etc.

I question this because I have seen in Pakistan, even when the countries economy went down the hill, the home values appreciated above and beyond the inflation rates in some metropolitan areas. And even with so much uncertainty they continue to grow! Also, here in US, some of the urban areas which were mostly populated with low income poor house holds are suddenly changing demographic and the home values have gone sky rocketing.

[Khanzada]

ahmad,

The drivers for home value appreciation are fundamentally different from that of the economy, as i understand. Remember a rule of thumb: given an average area, the prices of real estate will invariably always rise.

One very powerful reason of appreciation is hidden in your question alone. When you say 'even when the economy is going down, their prices continue to spiral up' is the reason actually. See, for an investor who has a few bucks to invest, the following are the avenues where he can invest to make some money:

1) Stock market (equity)
2) Bond markets (debt)
3) Mutual Funds
4) Precious metals
5) Real Estate
6) Currencies, Others

Theoretically (and practically too) stock markets and bond markets move in opposite directions (don't ask the reason here, since that is topic for a separate discussion). Assuming a regular economic downturn case...the tell tale sign of a declining economy is its falling stock market (that means that the bond markets are up). However, bond markets generally give a lower return compared to stock markets so for ambitious or risk-taker investors who wish to invest and get more out of their money, it does not present an attractive opportunity. They turn to other avenues then.

Real Estate is one of them. It is a storehouse for value of the money. In downer situations, real estate markets and deals are generally up since it means a lot of people with money are turning to real estate markets to invest (to buy and to sell at profits). Other factors that may affect the price in any given area are locality, general construction, proximity to city centre/business centre, presence of new construction sites within the area, some over-riding exogenous phenomenon (like the Tasman Spirit in Karachi) etc. etc.

It is not a simple straight-forward relationship between various factors and their resultant impact on real estate prices. It does also incorporate things like national savings rate, interest rates, availability of cheap consumer credit, sophistication of the consumer banking system (in terms of providing mortgage plans etc).

Hope it helps