Factors That Affect Home Prices – Flow of Investment Funds

“How is the market?”

This is the question most often asked real estate agents.  “Good” or “Bad” are terrible answers to give someone because the answer really depends on their situation.  Are they buyers, sellers, landlords, or renters?  Each will need an answer that addresses their needs.  What is good for a buyer is not what is good for a seller.  After finding out what somebody is planning on doing and giving them their answer, one thing that often surprises me is that people almost never ask an important follow up question…

“Why do you say that?”

Really… how DO you tell where home values are heading?  The answer is that there are many factors that influence home values.  Some are generally stronger than others and occasionally one will leap out and become a major factor that seems to dominate the rest.  For example, when the mortgage meltdown showed up nothing else seemed to matter.  It didn’t matter that the business cycle hadn’t changed yet.  It didn’t matter that the population was still expanding and that crime was still low.  The pool of money buyers could use to buy homes became small very quickly which overrode everything else.  In the absence of a catastrophe like the mortgage crisis, home values will head in the direction that the sum of the influences dictate.

So what are the factors that affect home values?

Now you can see why this is not so easy.  There is no one repository of information for all these factors.  Some of those reflect long term trends and some reflect short term blips.  You should not make an important choice like whether or not to buy or sell a home based on information from any one category.  In time I’d like to write about all these categories and how they affect Santa Cruz.  I’m writing this blog today because something caught my eye in Yahoo Finance about the London home market that is a clear illustration of one of those categories- the Flow of Investment Funds.

London and the Flow of Investment Funds

Right now you can spend $800,000 for one bedroom condos in a not-so-great neighborhood.  Seriously?  Yes apparently one housing bubble here in the states wasn’t enough people in the rest of the world to keep control of their enthusiasm.  The reason for this bloom in prices in part, is that right now London real estate began being viewed as a safe haven for money being made in Russia and the Middle East.  London has a tight supply of housing, interest rates were low and the tax laws affecting foreign nationals good.  London is also a financial capital so many wealthy people visited it and then bought homes there that they could visit to avoid the hot summers in the Middle East.  This has triggered a mania for London Real Estate that is attracting more money.  The flow of investment funds is the flow of money from one area of investing to another.  More money moving into an investment category means higher prices.  No, don’t take this as a call to go spend your life savings on a condo in London.  Eventually the other market factors will begin to turn and this factor inflating the London real estate market will evaporate leaving it to fall to something more normal.

-Bryan Myers