Properties: Reasons to Boost Their Prices

The constant upward trend in property prices is an international phenomenon. In the Eurozone, the growth rate of house prices for Q2 2021 reached 6.8% on an annualized basis. Respectively, in OECD countries, nominal house prices increased by 12.3% on average, on an annual basis. The countries with the highest house prices were Turkey (30.2%), Russia (21.1%) and the United States (17.4%).

The factors that fuel the rise in prices

• The environment of low interest rates that prevails worldwide and mainly in developed economies.

• The problems that prevail in the supply chains worldwide, resulting in an increase in the cost of several materials required in the construction process.

• The distance work, which led a large part of the workforce to work from home, resulting in increased demand for larger properties.

• Fiscal policies implemented internationally by state governments to support demand and liquidity of economic units due to pandemic response measures.

• The growth of private construction activity, which as a sector of the economy does not seem to be significantly affected by economic developments in economies.

• Rising investment in housing, a trend that will intensify during 2022, and as inflation will push even higher to higher levels.

The sharp rise in house prices internationally (this is reflected in the prevailing property prices in OECD countries), shows the need for a careful assessment of the residential real estate market, in relation to the economic cycle of the economy, to become easier to predict significant price fluctuations.

The evaluation indicators of the real estate market, in this effort, are:

  • Profitability Ratio = Property Price / renting income
  • Affordability Ratio = Property Price / disposable income

The course of these two indicators may deviate from their long-term average equilibrium, showing periods of overestimation or underestimation of the value of real estate-houses in relation to their respective fair prices. More specifically:

Profitability ratio

The Profitability ratio shows the size of profitability, is defined as the ratio consisting of the nominal prices of residential real estate to the income earned from rent, and shows the relationship between the cost of ownership and the return that the landlord would earn from rent the house he has.

An increase in the price of this index would show us that it is a more profitable rent than the market, with the result that the selling prices of real estate will decrease.

On the contrary, a decrease in the price of this index, shows that the period is better for buying a home than renting it, with the result that the prices of real estate for sale increase.

Αffordability ratio

The price of this indicator indicates whether the housing market is affordable, due to the higher degree of repayment capacity of the mortgage.

An increase in the price of this index, shows that in the current period under review the purchase and possession of a home becomes less affordable (more difficult to repay a mortgage).

On the contrary, a large increase in disposable income (decrease in the value of the index) increases the demand for housing, and since the purchase of housing and mortgage service, it is easier.

In this case, however, both the Profitability ratio and the Affordability ratio in OECD countries are at higher levels than their long-term average, indicating conditions of overestimation (if not overheating) of the value of the housing market. Only Italy and Poland move slightly below their respective average.

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TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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