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What Factors Determine Residential Property Value?

8 Aug 2023

What Factors Determine Residential Property Value?

The residential property market provides an interesting lesson in the difference between the cost of something and the value of it. The price of many commodities is set by adding a profit margin or markup to the cost of producing the goods.

When it comes to determining a residential property value, however, the cost of production is only one of many factors. Let’s take a look at the many factors that help determine residential property value.

Market-Based Factors

Property values are greatly influenced by what’s going on in the market. This is why you’ll often hear a real estate agent talk about letting the market set the price.

Supply and Demand Dynamics

It’s a fundamental rule of economics that supply and demand affect price. In the housing market, when there are more potential buyers than there are residential properties available, prices will rise. Conversely, when there is more housing stock available than there are buyers, property values may decrease.

Supply can be affected by the rate of new properties being built – which can be influenced by supply chain factors, qualified builders and tradespeople available, etc. Demand can be affected by economic factors that we’ll discuss below.

Location and Neighbourhood

A key factor in determining the value of a residential property is its location. You can have two identical houses in two different neighbourhoods, but they can have very different perceived values. So it’s not just the age and size of a home that determines its value.

Proximity to public transport, access to motorways, the distance to shops, schools and amenities – these all affect the value of a home. The reputation of a neighbourhood can also affect the price of a home. Some call this the zip code effect.

Comparable Sales and Appraisals

When trying to calculate the value of a property, people often start by looking at what other homes in the area have recently sold for. This can be quite relevant, especially when you take into consideration the effect that location and neighbourhood have on the value. It’s important, though, to compare homes of similar size, age, style and condition.

Economic Factors

Generally speaking, economic factors help determine how much money buyers have to spend. They also highlight spending habits and eagerness to purchase.

Interest Rates

For a buyer, the interest rate on a loan is the cost of borrowing money. When interest rates are low, mortgage payments are lower – making it more affordable for many people to enter the property market or to add to their property portfolio.

The reverse is true when interest rates are high. It’s more expensive to borrow, so some people will wait for mortgage rates to come down before buying.

Economic Growth and Employment

When employment rates and incomes are high, there is more willingness to purchase. This is true for almost all purchasing categories, including real estate.

During times of higher unemployment or recession, the real estate market tends to slow down as buyers are more reserved. House prices may, in turn, come down as a result of the market slowdown.

Inflation and Consumer Confidence

Consumer spending slows during times of inflation when prices are high. You may remember from your economics class that prices usually rise when interest rates fall.

This will then affect buyer behaviours and consumer confidence – how people feel about the state of the economy. When confidence is high, however, spending tends to increase. Borrowing also tends to increase, and banks tend to lend more in a buoyant market.

When people are nervous about their job security, how they’re going to pay the bills, etc, they’re less likely to want to borrow money in a way that is going to stretch them too far. These factors, then, affect spending and borrowing habits, which in turn affect residential property values. So it’s important to keep an eye on economic factors when you’re looking at New Zealand housing prices.

Property Features 

The physical properties of the home can affect a house price. While we all have different style preferences and tastes, there are some factors that will always influence property value in NZ.

Property Size and Square Meters

Generally speaking, the larger the property, the higher its potential value. We look at the square meter size of the house itself as well as the size of the section.

A property value may also be affected by whether the section is freehold, leasehold or cross-lease.

Number of Bedrooms and Bathrooms

One of the first questions from a buyer will be about how many bedrooms and bathrooms a home has.

Having more than one bathroom is usually more desirable to a buyer, and the inclusion of an ensuite bathroom is also something that can add value.

The number of bedrooms is an important consideration when it comes to having enough space for children and teens, accommodating visiting family members, as well as the recent increase in working-from-home arrangements.

Condition and Age of the Property

Newer homes will often fetch a higher price as there will likely be less maintenance or repair work needed in the foreseeable future. When buying an older property, if you know you will need to upgrade the kitchen or repair the roof when you’re buying a property, that will likely be negotiated into the price.

On the flip side, older character homes and villas can be worth quite a bit if they’re kept in good condition.

External Factors That Determine Residential Property Value

Government Policies and Regulations

For the past few years, we’ve seen various attempts by the NZ government to influence the housing market. Initiatives have been introduced to try to keep NZ house prices affordable and to make more homes available.

Our national and regional policymakers have tried to inject money into the housing and infrastructure sectors to help homeowners. These initiatives are intended to increase the availability of affordable homes and keep residential property values at a sustainable level.

Neighbourhood

As we’ve introduced above, a neighbourhood (and its perception) can influence a property’s value. You may find that neighbourhoods that are a mix of private and social housing see property values that vary from those with no social housing. Property values are also affected by school zones – homes in popular or desirable school zones will often see that factored into the asking price of a home.

Crime Rates and Safety

Average house prices are affected by the crime and/or safety of an area. People don’t usually provide the crime stats of a neighbourhood when they’re selling a property. But you will hear it mentioned that a property is in a “safe, quiet neighbourhood”, implying that the area has low crime.

Importance of Researching Property Value

As you can see, there are a number of factors that can affect residential property values. It’s important to have the appropriate information available and to do your research, whether you’re buying or selling.

Because there are so many factors to consider, it pays to have an experienced, knowledgeable and well-connected team working with you.

At Lowe & Co, we stay up to date with all of the economic and external factors that affect NZ property values. We have robust comparative data on the market, and we can help you make informed decisions along the way.

If you’re looking for to understand the market value of your property, our team offers certified free property appraisals. Get in touch today.

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