Pressures That Dominate Real Estate Value

[Janos Sztojka]

Pressures That Dominate Real Estate Value

When people usually think of real estate value they think of two forces; supply and
demand. Yes, this is correct; however supply and demand only fall under the one of the
four main categories that drive/depress real estate value. Supply and demand fall under
the economic category of influences in real estate value. The other three include; social
impact, government subjection and environmental forces.

When looking at social impact, there are a few things one would want to consider
determining the effect it will have on real estate value. Most of all the value would
fluctuate accordingly with population characteristics. This tie into the potential for
demand in the economic section of value; the more demand, the more value a property can
derive. Population however should be looked at in more depth by breaking down the sample
by age and gender, rate of household formation and partition, as well as analysis of the
social values such as education, law and order, and lifestyle preferences. Careful
consideration of these factors will help establish trends in what would be reflected in
real estate values.

Next is the government subjection, accounting for a large aspect of real estate value.
This includes political and legal activities on several levels of government. These
government influences have the power to overwhelm natural market forces such that you
would find in the economic category. Government has their hand in providing facilities and
services that affect values as well as a one of the main contributors to patterns of land
use (zoning, by-laws, etc). The following are some things to look out for when assessing
the government subjection of a market; fire and police services, garbage collection,
transportation arrangement, utilities, zoning, building codes, health codes, and fiscal
policies. Also the legislation that is set forth by the governmental factor must be
accounted for, this would include; rent control laws, rights to farm, rights for managing
forest, rights to agricultural land, restriction on ownership, new development laws,
control of hazardous and toxic materials, and laws affecting investment power, loan terms,
and mortgage lending institutions. All in all this is quite the category and its
understanding will provide for a great idea of where values are currently and where they
are headed.

In addition to the social impact, as well as government subjection, the environmental
forces also play a part in real estate values. These can be natural or man-made and are
analyzed by observing several aspects. Climatic conditions (snowfall, rainfall,
temperature, humidity) would be an obvious one that would affect the values of building
somewhere as well as maintenance and carrying costs, as well as the quality and type of
build. Topography, soil and consideration of any toxic contaminants would also be of great
importance as well as natural barriers, such as rivers, mountains, lakes, etc.

Just to get out of the 4 factors of real estate value; it is important to mention that
there are some overlying factors that would be part of 2 or more of the categories. Once
such factor is location, this is the link of a property in time/distance to any given
origin or destination of a resident/user of the property. Location could fall under for
environmental and economic, if not all categories. Due to the area and property type,
properties access to public transport, schools, hospitals, stores, employment, suppliers,
recreational and cultural facilities, parks, and places of worship would of importance.

This would also lead us back to the economic factor of influence on real estate value. The
fundamental aspects to look for here include: employment, price levels, wage levels,
industrial and commercial expansion, mortgage credit availability and cost, stock of
vacant property, stock of improved property, occupancy rates, construction costs and
rental/price trajectories of existing properties.

And there you have it, the 4 major pillars of real estate value; social, governmental,
environmental, and economic. Taking a deep look at each of these sections one would
assemble the entire spectrum of current real estate values and more importantly future
real estate values.