Younger people tend to go into the business because they are following in their family’s footsteps or they are intent on building a career in a field they love, as well as one that pays well.
The real estate industry encompasses the many facets of property, including development, appraisal, marketing, selling, leasing and management of commercial, industrial, residential, and agricultural properties.
The most comprehensive set ideas of how to value such assets have been developed in connection with the stock market. The value of a share is its net present value, i.e., the value of all expected future earnings from the share, discounted for risk, for financing costs, and for time-preference. Since no-one knows what the risks, etc are, stock analysts fall back on rules of thumb. In the stock market, a very popular rule of thumb involves the price-earnings ratio, which measures how high the company’s net earnings are, in relation to the price of the stock. It’s the same in the housing market. What is generally viewed as reasonable is similar to what’s considered reasonable in the stock market, although houses tend to be expected to yield slightly less, perhaps because a house’s value depreciates less over time than the assets of a typical company?
What is high for a market, and what is low is largely a matter of history and of comparison with other assets. Over-valued property markets are extremely seductive.
There are often good reasons to believe that a particular market deserves higher valuations than it did in the past, or than other markets deserve. So, do not always believe that the current market is high due to fundamental factors.
Factors that affect change in macro-economic variables in house prices:
If house prices are much higher than the cost of building (construction cost), developers are motivated to put up buildings. As new supply comes into the housing market, that tends to put pressure on prices. So when house prices are far greater than new-build costs, it’s a danger sign - prices are like to come down. If the prices of the house are so high that very few people can actually afford to buy them, then their value will likely to fall in the future.
People tend to actively look for cheaper and better alternatives, where houses are very highly-priced; people will seek more affordable alternatives.
Yet above all, buyers pay attention to what other buyers are prepared to pay not some exogenous objective information. So there is no perfect market driven by external news but rather a predictable market, feeding on itself. An economic crisis, a currency crisis and house prices fall and are no longer out of line with reality.
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