The real estate industry accounts for a sizable portion of most people’s wealth, particularly for many homeowners in Malaysia as the nation continues to expand and advance into urbanisation. The scale of the industry has made it very lucrative for many investors as the market grows. In Malaysia, 76.9% of people own primary homes, measured in 2019 by DOSM, an increase from 76.3% in 2016.
In this article, we’ve explained some main factors which affect the real estate market and the number of investments available. Read on to know more:
4 Key Factors That Drive The Real Estate Markets
Under demographics, it is the characteristics of a population being segmented with criteria in place, like race, age, gender, income, migration patterns, and the population growth of the nations. Although this area of factor tends to be overlooked, it does have an effect on how properties are valued and the types that are in demand. Major changes in a country’s demographics can have a long-term impact on real estate trends.
For instance, the baby boomer generation is an illustration of how it would affect the real estate market significantly. The shift to retirement from these baby boomers, beginning around 2010, is bound to create a wave of effect which would be recognized for decades to come.
Although there are various ways the demographic segment affects the real estate market, for an investor, there may be some questions asked along the way:
- i) Would it affect the demand for second homes in popular holiday areas as more begin to retire?
- ii) What effect would this have on the demand for larger homes if incomes were lower and the children had all moved out?
With these questions in place, then it could help investors to narrow down their preferences and desirable real estate investments here.
2. Interest Rates
If you plan to purchase a home with a mortgage in place, it’s best to research the interest rates with a mortgage calculator before placing the down payment. Interest rates play a big role in the real estate industry, as slight changes to their numbers generally influence one’s ability to buy a home. An example, when interest rates are low, the cost of obtaining a mortgage also falls, which drives up the demand for real estate and its prices. Vice versa when the interest rates increase too.
However, when considering the effect of interest rates on an equity investment like a real estate investment trust (REIT) instead of residential real estate, its relationship can be looked at as similar between interest rates and bonds. As interest rates fall, the value of a bond increases as its coupon rate grows increasingly desired, and when interest rates go up, the value of bonds falls. It is similar to if the market interest rates fall, REITs’ high yields would become more appealing, increasing their value. However, when the interest rate is high, it becomes less enticing, lowering its value too.
3. The Economy
The economy has a great effect on the real estate market, as it is the main indicator of the country’s health. Economic statistics such as GDP, employment statistics, manufacturing activity, and commodity prices are commonly used to evaluate this. Generally, when the economy is slow, so will the real estate market.
However, the recurrent economy can have diverse effects on the different types of real estate. For example, if a REIT has a greater proportion of its interests in hotels than in office buildings, it will be more impacted by an economic crisis. Hotels tend to have short-term leases, while office tenants are generally long-term tenants that cannot be altered during an economic crisis. Hence, although you should be wary of the economy’s cycle, being conscious of the sensitivity of real estate property to the economic cycle should also be focused on.
4. Government Policies/Subsidies
Legislation is another key factor that could impact the real estate industry here. Being aware of the current government’s incentives may help determine the changes in supply and demand, as well as identify potential false trends in place. Some benefits which may be given by the government to increase the demand for properties in real estate are tax credits, deductions, and subsidies.
Malaysians were given benefits as well, as stated in the 2023 Budget by the government. The benefits include providing 75% stamp duty discount to homes which are valued between RM500 000 to RM 1 million through the end of 2023, as a way to encourage homeownership among 1st time homebuyers. It is also a way to grow the real estate market after being hit by the pandemic and also the rise in cost of living in Malaysia.
Importance of Real Estate To Our Society
Real estate aids in stabilising the economy, as it provides housing and properties for businesses. It also gives off a reputation that the country is performing well. Even during the economic downfall, the real estate market was strong, as mortgages or interest rates were lower. The real estate market also serves as a guarantee for financing and plays an important element in economic stability, thus increasing the country’s GDP growth.
Meanwhile, it also attracts foreign investments; be it purchasing homes or attracting local and international companies where the offices will be set up. Without real estate, we’d be left homeless. There wouldn’t be essential buildings too to shield us or service our needs.
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