Published on January 29th, 2023.
2023 shapes as a very interesting year for the real estate markets of the USA and the rest of the world. We are faced with very unique economic conditions where inflation is quite high and many central banks are working to reduce inflation through the increase of interest rates.
But this is having a negative impact on low and middle-income people’s ability to enter the housing market. This article will explore a variety of issues that are influencing the real estate market that will play a significant role in the ultimate real estate trends throughout 2023.
Economic conditions have a significant impact on real estate market trends. Specifically, things such as levels of employment, trends in wage growth, and the confidence of consumers are all very influential.
The impact of employment on the real estate market is easy to understand as people that are employed and making a good amount of money with a reliable income track record are going to be eligible to buy a property and thus likely to be looking.
Whereas if unemployment reaches very high levels, people that would have been looking to buy a home will no longer be able to because they will not be able to meet lending requirements.
Trends in wages will also be very influential in the current environment, where inflation is significant, and the cost of living is increasing at a rapid rate. The cost of living is incorporated into a lender’s assessment of your ability to service a loan so if the wages you make are not keeping up with the increase in the cost of living, this could decrease your potential to borrow, making it a lot harder to get into the market, which could lead to a downtrend in the real estate state market.
Combining both of those issues is consumer confidence. If the general public is having fears about the nature of economic conditions throughout the next 12 to 24 months, and if they are suspecting there may be a downtrend in the real estate market, then potential buyers may choose to strategically hold off from purchasing in the event that they do not purchase something that goes down in value.
Supply and Demand
The supply and demand of housing also have a very big impact on the trends of real estate markets. The theory is that if there are more houses available than there are people that are wanting to buy a house, then there is too much supply, and thus house sellers will keep lowering the price of their property in order to try and attract a buyer.
When this happens at scale, this leads to a downtrend in the real estate market. Whereas when there are more people that want to buy a house, than there are houses available this is a demand-side issue and leads prices of a real estate market to increase on average.
Though there might be some global trends in terms of housing supply and demand. It tends to be more of a local issue as different governments have different policies to try and influence supply and demand, and some of these policies are more effective than others. The supply and demand dynamics of the market you are looking to buy into could be very different from the supply and demand dynamics of a different geographic location.
Interest rates impact how much it will cost you to borrow money. As interest rates increase, so do your loan repayments, which ultimately decrease your borrowing power.
In current market conditions around the world, many central banks in many of the Western countries tend to be increasing interest rates in a bid to hold inflation at its current level and preferably bring inflation down. The central banks understand that increasing interest rates decreases the amount of money people will have to spend in general, which tends to slow down the economy which is their target strategy for trying to reduce levels of inflation.
Experienced lenders find ways to assist buyers in any market, but the increased rates can make things tricky for many.
Political events refer to policies and regulations set by the government that has an influence on the real estate market. Governments tend to try and influence the real estate market and will be either trying to help the market grow when they feel the economy is slow and they are wanting to try and speed it up.
Whilst in other times they will try and slow down the market to try and make housing more affordable for more people. There are many different ways governments can enact policies to influence the real estate market.
One of these ways they can influence the real estate market is by the taxation rules levied upon real estate investment. If there are many deductions that make real estate investment a tax-efficient activity and a great way for people to store and grow their wealth with minimal taxation impact then this will drive more buyers to the market, which will feed the demand side of the supply and demand equation. The impact of this will be that prices will likely go up.
Another way that governments can influence the housing market is by opening up more land for housing to be built on. By reducing the number of barriers and red tape that developers need to work with in order to develop and build more housing they can encourage housing development, which contributes to the supply side of the supply and demand equation, which will tend to decrease the price of houses.
There are many different ways they can both help the supply or the demand of houses depending on their current goals.
In many Western countries at this time housing is expensive for many middle and low-income earners so governments are looking at ways to make housing more affordable. But this is complicated by the fact that inflation is quite high and they are trying to restrain inflation by increasing interest rates, which has a counterintuitive impact on the ability of low and middle-income people to borrow money to buy a house.
Natural disasters can devastate a housing market overnight. If a highly populated area is subject to a significant weather event that causes significant damage to many homes, then this can decimate the local real estate market.
If an area has not had an adverse weather event for decades, then people tend to downplay the potential recurrence of a natural disaster, and areas can experience significant residential development as a result of this psychological tendency.
When a natural disaster hits, this can remind people how dangerous it is to live in a certain area which can lead a lot of people to leave that area which creates a significant supply of housing for sale, which can drive the value of those houses down dramatically.
However, this is not an ironclad rule because there are many luxury locations such as Florida that regularly experience natural disasters, but people like living in those areas so much that it does not seem to have a negative impact on the local real estate market.
Is very difficult to make a high-probability prediction regarding the likely real estate market trends throughout 2023. Though housing prices in many places are unaffordable for many this issue is complicated by the fact that inflation is high, so interest rates are being increased to try and combat that. This has a negative impact on people’s ability to borrow money and therefore enter the housing market.
Combining that economic contradiction with the fact that there is global turmoil in a political sense and an increased number of adverse weather events occurring all over the world, makes it a very challenging thing to predict the market with any degree of certainty. The best way to gauge the market will be to pay attention to particular regions that are of interest to you and monitor these factors closely.
Complete the form to connect with us. Feel free to ask any questions about our commercial financial services.