Factors Influencing Real Estate Value: Economic, Political, and Environmental Aspects

Chapter: Factors Influencing Real Estate Value: Economic, Political, and Environmental Aspects

This chapter explores the intricate interplay of economic, political, and environmental factors that significantly influence real estate value. Understanding these forces is crucial for accurate property valuation, investment decisions, and urban planning.

A. Economic Factors

Economic factors represent the dynamic forces of supply and demand within a given market. These forces are constantly shifting and reshaping property values.

1. Macroeconomic Conditions:

• Gross Domestic Product (GDP): A growing GDP generally signals a healthy economy, leading to increased consumer spending and business investment, which can drive up property values. Conversely, a recession can lead to decreased demand and lower prices.
  • Formula: GDP = C + I + G + (X - M)
    • Where:
      • C = Consumer Spending
      • I = Investment
      • G = Government Spending
      • X = Exports
      • M = Imports
• Inflation: High inflation can erode purchasing power and lead to increased interest rates, making mortgages more expensive and potentially dampening demand for real estate. However, real estate can sometimes act as a hedge against inflation, as property values and rents may rise with prices.
  • Example: A period of hyperinflation could make fixed-rate mortgages incredibly beneficial to borrowers, while landlords would be incentivized to raise rents whenever legally possible.
• Unemployment Rate: A low unemployment rate indicates a strong labor market, leading to higher incomes and increased demand for housing. High unemployment can lead to decreased demand and potential foreclosures, depressing property values.
  • Experiment: Tracking the correlation between unemployment rates and housing price indices in specific metropolitan areas can provide empirical evidence of this relationship. Collect data from reputable sources (e.g., Bureau of Labor Statistics, Federal Housing Finance Agency) and perform regression analysis to quantify the impact of unemployment on housing prices.

2. Local Economic Conditions:

• Employment Growth: Areas with strong job growth tend to experience higher demand for housing and commercial space, driving up property values.
• Industry Diversification: Economies reliant on a single industry are vulnerable to economic shocks. Diversified economies offer greater stability and resilience. Communities dependent on oil and gas exploration for employment have undergone cycles of boom and bust in recent decades.
  • Formula: Herfindahl-Hirschman Index (HHI) can measure industry concentration within a local economy. A higher HHI indicates lower diversification and higher vulnerability.
    • Formula: HHI = Σ (Market Share_i)^2, where Market Share_i is the market share of firm i.
    • Practical Application: A city heavily reliant on manufacturing sees property values decline when that sector experiences layoffs due to automation or globalization.
• Wage Growth: Rising wages increase affordability and stimulate demand for housing, leading to higher property values.

3. Interest Rates:

• Interest rates directly impact the cost of borrowing for both homebuyers and developers. Lower rates make mortgages more affordable, increasing demand. Higher rates increase borrowing costs, potentially cooling the market. Long-term rates affect construction of residential and commercial property. As interest rates drop, homes become affordable for more people, raising demand for existing housing as well as new construction.

4. Rental Market:

• Rent Levels: High rents encourage home ownership and all types of new construction, while low rents discourage ownership and construction.
• Vacancy Rates: Prior overbuilding might result in a high vacancy factor that would be reflected in lower income and lower valuations for commercial property. High vacancy factors in residential rentals often mean lower rents or rent concessions, which result in a lower net income and a lower property evaluation.

5. Supply and Demand Dynamics:

• New Construction: A surge in new construction can increase supply, potentially dampening price growth. Conversely, limited new construction can lead to shortages and price increases.
• Demographic Trends: Population growth, migration patterns, and changes in household size can significantly impact demand for housing.
  • Example: An influx of young professionals into a city can drive up demand for apartments and condominiums in urban areas.

6. Property-Specific Economic Factors:

• Plottage: The possibility that an economic site can be combined with a contiguous site, where the combined value would be greater than the separate site values, would be a positive influence on value (plottage increment).
• Parking: The availability of adequate on-site and/or off-site parking will affect value for both commercial and residential property.
• Corner Influence: Commercial property located on a corner is generally regarded as being more valuable than property in the center of a block. In fact, the closer to the corner, the greater the value. The reason being that the corner property is more likely to be noticed by foot and vehicular traffic and corners provide greater signage and/or window exposure. Property at a stop light is even more valuable as it is more likely to be noticed. Residential corner lots have more traffic, more noise and less privacy.

B. Political Factors

Political factors encompass government policies and regulations that directly or indirectly impact real estate value. There is an increasing trend for governmental forces to attempt to mitigate or direct economic forces, to the point where it is often difficult to distinguish between the two. Examples include such things as monetary and trade policies, taxes and tax exemptions, and government regulation of the financial market. In fact, few economic forces are without some government influence. When analyzing the effect of economic factors on real estate value, the appraiser must bear in mind the effects of government actions in the economic arena. Political or governmental factors result from direct and indirect government influence and intervention.

1. Taxation:

• Property Taxes: High tax areas might result in lower valuations but lower tax areas might result in greater demand and higher property valuations.
• Capital Gains Taxes: Taxes on profits from the sale of real estate can influence investment decisions and market activity.
• Tax Incentives: Government programs offering tax breaks for specific types of development (e.g., affordable housing, brownfield redevelopment) can stimulate investment in those areas.

2. Zoning and Land Use Regulations:

• The zoning of a property can materially affect value as it determines the use to which a property can be put. Zoning which allows a shopping center is likely to result in a valuation many times higher than if the parcel were zoned for single-family dwellings. The proportion of property zoned for a particular use will also affect value. If too much land in an area were zoned for office use, the result would likely be a lower per square foot value for such land than if not enough land had been set aside for such use.
  • Example: Changing zoning from residential to commercial can dramatically increase land value, but also faces community opposition.

3. Rent Control:

• Controls that limit rent to less than the market forces will limit value. The severity of the rent control ordinance will effect the reduction as to value.

4. Growth Management Policies:

• Moratoriums on new construction, limitation on the number of building permits being issued and high development fees limit new construction. The effect is generally higher rents and higher values for existing structures and lower evaluations for undeveloped land.

5. Environmental Regulations:

• Environmental restrictions include restrictions against development because of such things as endangered species, prohibitions on filling in wet lands, and requirements to create or maintain greenbelts. Environmental legislation is a growing area of government influence with a major impact on real estate values. Environmental restrictions may increase the cost of housing development by requiring developers to mitigate adverse environmental affects of construction or to set aside land for open space. Government policy regarding harvest of timber from national and state lands affects the cost of lumber for construction.
  • Example: Regulations protecting wetlands may restrict development in certain areas, increasing the value of developable land elsewhere.

6. Building Codes and Health Codes:

• Like zoning, building and health codes are based on the police power of the state to protect the health, safety, and welfare of citizens. Requirements of codes are often outdated and can add additional expense to development.

7. Government Spending:

• Investments in infrastructure (roads, public transportation, schools) can increase the attractiveness and value of surrounding areas.
  • Example: The construction of a new subway line can significantly boost property values along its route.

C. Environmental (Physical) Factors

ENVIRONMENTAL (PHYSICAL) FACTORS are those aspects of the physical environment, whether natural or man-made, that influence value.

1. Location:

• It is now rather a trite saying, but it is true, “The three most important factors influencing value are location, location, location.” The location in relation to desired amenities and to developed and natural assets affect value.

2. Climate:

• Temperature, wind, rain, and snow all affect the desirability of areas for recreation and quality of life, which, in turn, influences value.
  • Example: Regions with mild climates and abundant sunshine often command higher property values than areas with harsh winters or frequent natural disasters.

3. Water Resources:

• The availability of a sufficient and affordable supply of quality water plays a significant role in expansion and relocation of industries, as well as residential development.

4. Transportation Infrastructure:

• The availability of adequate highways, rail, and airports, as well as public transportation, all affect value. A new freeway is built that allows commuters from a small town to reach jobs in the city in half the time it used to take. Suddenly, it is practical for those with jobs in the city to live in the town, and property values go up. The condition and size of streets, the amount of traffic, as well as ingress and egress, will affect value as to specific properties.

5. Views and Aesthetics:

• View is a significant factor and, in some areas, a water view can more than double the value of a property when compared to similar properties lacking such a view.

6. Soil Conditions:

• Soil that can support a structure would generally be more valuable than locations requiring a great deal of work to make the site ready for development. Recent discoveries in earthquake-prone areas have determined that some soils that otherwise test as stable and suitable for construction can liquefy during an earthquake. This condition can cause foundation failure and building collapse, particularly in multiple- story buildings. Soils testing can now determine this condition. As may be imagined, parcels with soil that exhibits this condition have diminished value.

7. Site Characteristics:

• Size and Shape: All other things being equal, a larger site is more valuable than a smaller site, but value is not necessarily proportionate to size. As an example, a residential lot 80 feet wide by 300 feet deep would not be three times as valuable as a lot 80 feet wide by 100 feet deep. A regular shaped lot with reasonable width and depth is generally more valuable on a square foot basis than an irregular shaped lot, such as a triangle.
• Exposure: Residential property where the morning sun lights up the kitchen and dining areas and where the patio enjoys a sunset view are likely to be more valuable than similar properties lacking these amenities.
• Topography: Flat or rolling land with good drainage would be more valuable than land prone to flood or with steep slopes that would limit development or increase costs.

8. Environmental Hazards:

• The presences of any negative environmental problem like contaminated soil, asbestos building products or even a chemical plant in the area could adversely effect value.
  • Example: Proximity to a Superfund site (a contaminated area designated for cleanup by the EPA) can significantly depress property values due to health concerns and remediation costs.

By understanding the complex interactions of economic, political, and environmental factors, professionals can make more informed decisions in the real estate market and contribute to sustainable and equitable community development.