What fuels the housing market?

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We all want to make money when we sell our homes. Why not? No taxes have to be paid on the capital gains if it’s our “family home.” Which makes this one of the few instances where the government doesn’t get a share of our earned income.

Of course, anyone who has had to sell real estate during a down turn in the economy wonders if there was something they could have done to reverse their bad fortunes. One solution is to wait until the market turns around. Of course this means it would be to your advantage to know what fuels the housing market.

Housing prices are fueled or smothered by a number of factors that tend to work together. While some of the factors have a greater influence then others, mixed together they ignite or extinguish the demand for housing.

Interest rates have long been known to influence the price of housing. This shouldn’t be too big of a shock as we all are aware of the affects interest rates can have on our economy. Decreasing interest rates indicate that more people can now afford to purchase a house. This then leads to an increase in demand for homes. We all know that any time demand increases, so does the cost to purchase. The goal here is to purchase your house just before all other potential buyers find out about the decrease in interest rates.

So what happens when interest rates don’t change or are fairly stable, as we’ve seen in Canada over the past few years? Why are we still seeing house prices and values increase? Once again there are factors that are working together to ensure you pay more for your next house.

Firstly, there are a number of existing homeowners who are now “moving up.” These homeowners are known as the “Two Foot Itis” or “Keeping up with the Jones” folks? Homeowners in this category have usually realized a significant increase in equity (difference between what the house is worth and what they owe) and have decided to buy a bigger or newer home. However, due to the fact that they are already a part of the housing market, they do not feel the full financial effect of the current housing market. Their old home has also benefited from the booming real estate market. This means they are already significantly protected from the higher housing prices.

Secondly the home building market is not able to keep up with all the new demand. Not many homebuilders are ready to speculate when building homes valued at $250, 000 to $500,000. Instead, they tend to either build one or two homes at a time or wait until they are sold before starting new ones. Unfortunately for the homebuyer this translates into the age-old problem of too much demand and not enough supply. Of course this means housing prices are going to rise.

Most builders also know that people tend to get “spring fever.” Builders will attempt to take advantage of this by having new homes ready in the early spring. However this mini building boom only helps to drive up building costs resulting once again in higher housing prices.

Finally, other factors such as inflation, population growth and a positive economic outlook also influence the housing market. While further discussion regarding those topics would ensure a good nap on the readers’ part, they should not be completely ignored.

However, one must not forget that the most influential factor behind the rising housing prices is you. I can guarantee that if you stop looking to buy a house, the prices will start to drop. 

- By Myron Gordon
Myron Gordon owns TMSG Management Services Group, which provides management and financial services to growing businesses.

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