Factors that influence the value of a house: Macro-economic Factors Part 1

In our introduction, we looked briefly at the various factors that come into play when it comes to determining the value of a house. One of the factors outlined was Economic factors. This refers to the macro-economic environment of the location in which the property in question is situated and looks at things like inflation, incomes, as well as fiscal and monetary policy.

If you are confused by these terms don’t worry we will take care to define each in layman’s terms. When we say the macro-economic environment we are referring to major economic general economic conditions that subsist within a given area. The area in question can be a province, state, country or region such as SADC or the EU. The area in question is usually large and governed by some authority who may have some sort of influence on this macro-economic environment. However, the property owner will almost certainly have no influence.

Key elements of the macro-economic environment include:

• The political and legal aspects

• The economic aspects

• The demographic and social and cultural aspect

• The natural aspect as in nature itself

• The technological aspect

Now let us examine how these influence the price of a piece of property.

The political and legal aspects

People and thus buyers covet peace and stability as well as a stable and predictable legal environment that recognises and protects private property rights. A property located in a turbulent and politically unstable area is likely to attract fewer buyers interested in it. For while most people may have strong political beliefs and views when it comes to their own lives they would rather be left in peace. The converse is true for countries and regions with established political stability, which tend to have properties that attract lots of buyers and thus are worth more.

Linked to political stability is the legal aspect. When you buy a property you want assurances that it will be yours in perpetuity and you can enjoy it indefinitely. The last thing you want is the council grader to come knocking down your house and leaving you homeless or be given a piece of land which can be appropriated with little warning and no just compensation. For this reason, houses that come with deeds are definitely worth more compared to cession.

The economic aspect

Like the human body, we can always gauge the well-being of a given economy by looking at certain important key indicators including:

• Inflation - this refers to the rate at which prices are rising. The price of a property located in a highly inflationary area is always rising. In Zimbabwe, the government insists that the Zimbabwean Dollar (ZWL) be treated as legal tender. This means even when you are selling your property you should have a ZWL price as well. Naturally, we expect the price in ZWL of such a house would rise at a higher rate compared to the USD price. Not only that during times of high inflation people are always looking for “safe havens” i.e. assets to invest in so that they can preserve the value of their earnings. This generally means that the prices of houses located in a “high inflation” area are almost always higher than a “low inflation area”.

• Employment levels - it wouldn’t seem like it at first but the proportion of people employed in a given region or country does have an impact on the price of the house you are selling or want to buy. Generally, if more people are unemployed as is the case in Zimbabwe it means most people cannot afford to buy a given property. This is because they have less money to spend and are also unlikely to qualify for a mortgage. The result is less effective demand: there are fewer people who are willing and able to buy property. What it means is that in areas with low employment opportunities, the prices of the houses are lower and vice versa. In fact when the employment opportunities are so scarce abandoned houses abound. You can literally end up having a ghost town. This is the case with certain mining towns where minerals are exhausted with Reddcliff being a commonly cited example. This also happens when major factories relocate as happened in Detroit.

• Fiscal policy - remember when we said that the governing authority of a given territory normally has some influence when it comes to macro-economic factors? Well, one of these levers of control is the so-called fiscal policy. This refers to taxes and public spending (budget). Generally higher taxes means it’s expensive to own property but also means fewer people can afford to buy property. You end up with a situation as we have in Zimbabwe where properties appear “over-priced” i.e. fewer people can afford to buy them but they still appear expensive.

• Monetary policy - refers to interest rates and the amount of money in a country. This is another way governments can influence the economy. Printing money leads to higher inflation and we have already examined the impact of inflation on property prices above. We will look at the impact of interest rates on property prices in detail later on under mortgage availability.
  
  

There are other economic indicators such as GDP and retail sales but these have less impact. In the next instalment, we will continue to look at the other macro-economic factors that influence the price of houses and how they do this.

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