In most cases, consumers tend to have a pessimistic view toward price increases. When the overall prices of commodities in an economy increases (i.e. when inflation occurs), consumers more often focus on its adverse effects, overlooking its positive impact. Price increases, however, are indicators that an economy is progressing and the majority of the population is becoming more economically empowered. This development can be traced back to micro and macroeconomic factors suggesting that inflation, on a manageable rate, is not only good but also necessary.
Price increases, specifically real estate prices increase due to a number of direct and indirect factors.
- Demand and Supply
The law of supply and demand dictates that when the need for a commodity—say, a residential property—increases, its price is expected to go up and it is normal. This growing demand can be due to a number of reasons, such as the increasing desirability of the place and the booming economy around the area.
- Fiscal Inflation
Fiscal inflation simply means that there is an increase in the overall prices of commodities due to expansionary fiscal policies. When this inflation occurs, it is usually not in isolation—which is to say, when there is an increase in the price of one commodity, there is an overall increase in prices of mostly all commodities, even house-and-lot properties. Increasing prices is more of a chain response to the movement of the greater portion of the economy. When prices of raw materials and other overhead costs increase, it should follow that the price of your output increases to cover the additional incurred costs.
- Cost of Borrowing
Low cost of borrowing means low interest on loans from banks. When financial institutions impose low interest rates, people are more likely to make finance their long-term asset acquisitions with these loans. It means they can borrow more money and afford more expensive investments. With a lesser cost of borrowing, people have greater purchasing power to demand commodities that effectively pushes their prices up.
- Property Market Drivers
Property market drivers are characteristics of properties that make that asset desirable for investors and end-users. This can pertain to the quality of local schools, the proximity to local commercial establishments and recreational centers. Increase in property prices are also attributed to updates and upgrades, and the price buyers pay essentially functions as a premium for the comfort, satisfaction, or profitability of the property.
Having laid out the causes for the property price to increase, the question now is who benefits from the appreciation. First are the investors, who can gain hefty profit from buying properties at a lower price and selling them again once they have appreciated enough. Next are the end-users, those who actually live in the property they buy. A property is an asset that grows over time, and a fast-growing property is a fast-growing asset. Lastly, agents also have a lot to look forward to when it comes to higher property prices, because their commission depends on the value of the property that they sell—and the more expensive an estate is, the greater sum of money agents receive.
In summary, price increase, or inflation in general is a normal occurrence and an indication that an economy is growing more prosperous.
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