is director of Metropole - Property Investment Strategists property management department. She is an expert in maximising investment returns for her clients. Pam is co-author of "All You Need to Know About Buying & Selling Your Home." www.metropole.com.au Buyers often receive mixed messages from the media regarding how and why property prices rise and fall. In this short but informative piece, Pamela Yardney, Director of Metropole Property Management, explains why the value of homes fluctuates simply and succinctly. Basically it all boils down to supply and demand...
What it boils down to is this….
If there are plenty of houses for sale but no strong demand for them from buyers, in other words if every purchaser has a choice of four or five suitable homes available for sale, then there is nothing pushing up property values. However if for every house for sale there is a queue of 4 or 5 people ready to make an offer, this pushes up property values.
Okay, so what affects demand?
The demand for property - why more people are out in the market place looking for new homes, is affected by the local economy, job growth, market sentiment and affordability. Supply is affected by developers and builders building new homes and sellers putting their properties on the market.
The state of the rental market also affects how the buying market works. When demand for rental properties exceeds supply and rents start to increase, this increased cost of renting makes purchasing a home a more attractive proposition and encourages people to look at this as an alternative.
The level of interest rates also has a huge impact on home prices, because the biggest expense of owning a home is generally the mortgage repayments. When interest rates rise and houses become less affordable, property values tend to drop, particularly in suburbs where young families live, as they are often the hardest hit by increasing mortgage payments.
At other times in the property cycle when interest rates drop, housing becomes more affordable and more buyers are out there looking for new homes, encouraging property values to increase. Again, it all comes down to that old supply and demand equation!
New home prices are also inflated by the increase in the cost of land. As land becomes built out, 
particularly in inner city areas, it becomes a lot more valuable. This is where supply and demand becomes an obvious driver for the real estate market because as land becomes more scarce, its value starts to increase dramatically.
To put things into perspective - when I bought my first investment property in 1970, I paid $18,000 for a 3 bedroom weatherboard home on a ¼ acre block of land in the south eastern Melbourne suburb of Caulfield. That was 35 years ago. Fifteen years ago $18,000 would have bought me a swimming pool, today $18,000 would probably only buy me a carport.
This excerpt was taken from the new book All You Need to Know About Buying and Selling Your Home – by Michael and Pamela Yardney.
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