The Effects of Economic Changes on Real Estate Investments

Published on
 
July 16, 2024
economic changes

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You must have heard the expression, "real estate is a safe bet." That could be true; after all, bricks and mortar can give one a sense of solidity in a world of money markets. But is real estate really an absolutely sure hedge against inflation, or is the relationship a little more complex?

It comes down to this: health in the economy goes directly hand in hand with performance in the real estate market. The importance of understanding how those two work together cannot be overstated for any kind of investor, whether seasoned pro or testing the waters in this wild world of real estate. This guide will walk you through some of the main economic drivers—interest rates, inflation, and economic health—that could influence your investment decisions.

Interest Rates and Real Estate

Interest rates affect everything from what it costs you to purchase a property to how much rent you may collect. When interest rates go down, it becomes cheap to borrow money. That means lower mortgage payments and, therefore, more people can afford to buy a house.

The other side of the story is that with rising interest rates, mortgages become more expensive. It may put off a number of people in the market looking to buy and might dampen the market's speed. We have witnessed earlier on how low interest rates fueled real estate markets, bouncing back just like it did during the early 2000s. High-interest rate periods are usually aligned with slow market activities. Nonetheless, remember that real estate represents a complex ecosystem and that interest rates are one of the small pieces in that big puzzle.

Interest rates are increasing in July 2024 to levels not seen for several years. That may be good news for some but bad for others, especially investors. Existing owners who locked in then-current, lower interest rates might appreciate their assets, but new investors may struggle with financing or find the markets more competitive.

A Swiss study concludes that most definitely, interest rates do have an impact on real estate prices. In particular, interest rate cuts boost real estate prices in both the residential and commercial sectors. The effect of interest rates on house prices also varies across regions and reflects the diverse economic and market conditions that exist within Switzerland.

Economic Cycles and Real Estate Market

The economy is not stagnant; it moves through cycles, somewhat predictable ones, which are generally known as economic cycles. In regard to these, the realty market follows its ups and downs as well, each one having an effect on demand, supply, and, thus, on investment opportunities.

There are four phases in an economic cycle in particular: expansion, peak, recession, and recovery. During the expansion phase, jobs are created with increasing wages, and consumers become optimistic. This normally results in increased demand for housing, which can raise property values. Just as anything that goes up must come down, there is a peak. Economic growth slows down at some point, and one of the first indicators might be the full-on overheating of the housing market. This can slow down price appreciation or even decrease it in some cases. 

After the peak comes the inevitable recession. It is characterized by economic decline, job losses, and a reduced level of consumer spending. Even the housing sector falls victim, as decreased demand may manifest through reduced property values and higher vacancies among rental properties. Knowing how real estate has historically performed in different phases of the economy guides investors towards wiser decisions about when to buy, sell, or hold on to their investment property.

Employment and Wage Growth

Employment rates and wage growth usually dictate economic activity in a region, fundamentally connecting it to the real estate market. A booming job market is music to the ears of real estate investors. This means high employment translating to a huge pool of renters or buyers eyeing homes. As a result, there could be an influx of working professionals that will increase rentals and boost property values in surrounding areas.

The thing that matters is not simply the number of jobs, but the wages they offer. Robust earnings growth empowers people's ability to afford nicer places to either rent or buy, likely boosting demand for more high-end homes. In addition to residential, it encompasses commercial properties like office buildings and retail spaces. An increase in jobs plus wage growth could show up as higher demand for office space by growing businesses. And increasing disposable income can lead to consumer spending—for the benefit of retail proportions.

Government Policies and Regulations

Government policies and regulations play a significant role in shaping the market landscape. From tax breaks for first-time homebuyers to zoning regulations that dictate what can be built where, government policies can significantly impact real estate markets. For example, merely allowing new construction in areas where tax breaks exist could incentivize developers to build within those areas, thereby increasing the housing supply.

Government investments in infrastructure projects, like new roads or public transportation, can also give life back to neighborhoods. Change in real estate regulations can have a large effect also. For example, the institution of rent control laws may make some rental properties less desirable for an investor due to limitations on rental income. Therefore, it is very necessary for investors to keep eyes and ears open on proposed regulatory changes that might affect their current holdings or future investments. Any informed investment decisions should be taken on the basis of an understanding of the existing and future possible policy landscape.

Real Estate Investment Strategies to Economic Changes

Diversification and Risk Management

The golden rule of investment when it comes to real estate is to not keep all your eggs in one basket. Diversification insulates you against the volatility of the economy. At best, you should diversify across property types. Think of a mix between residential (single-family homes, apartments), commercial—office buildings and retail spaces—and even industrial properties. Each area will act differently in economic cycles and act as a buffer if another area slows down.

This will help you not limit yourself to a single geographical area. You will find other states or areas with good economic fundamentals, then go back and do further research. 

Also, Real Estate Investment Trusts enable an investment in a diversified pool of real estate without pitfalls of direct property management. Think about investing in REITs within your portfolio for increased diversification and professional management expertise.

Adapting to Market Volatility

While changes in real estate market are inevitable, there is no reason for any disruption to your investment journey. From time to time, study the market trends regularly and analyze the relevant economic indicators and local demographics. With this information, one should be able to find the potential opportunities and make amendments in the investment strategy accordingly. Scores of online resources and a rack of data analysis tools can yield you important insights about the market trend and risk. Leverage them to make informed investment decisions.

Conclusion: Navigating the Economic Landscape of Real Estate

From interest rates and employment trends to government policy and economic cycles, factors like these can impact your investments' performance. Keep in mind that it's always about keeping yourself well informed. Be current with all the news in the economy, analyze trends in the market, and study local demographics. These are ways of leveraging your knowledge to anticipate changes in the real estate industry and adapt your investment strategy accordingly.

Finally, there is the strength of diversification. Including REITs, adequate diversification in property types and locations drastically lowers risk and sets up a portfolio for long-term success. There is so much going on in real estate that this strategic approach will let you ride through with far greater confidence in economic changes, knowing that you're running your investments with the best possible chance of success.

Disclaimer

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.

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