What influences a property’s value?

Rates and Fees verified correct on October 21st, 2016

Changes in Australian house prices regularly make headlines around the country, but what influences property value?

What is property valueWhether you’re buying or selling a home or investment property, the question is how much is the property really worth? Rising house prices and market cycle trends are common topics explored by the Australian media.

From supply and demand through to location, facilities and planned infrastructure projects, there are plenty of factors that can influence property value. Read on to find out what drives property prices up, what drags them down and how you can find out what your home is worth.

Factors that affect property value

  • Location, location, location. The location of a property is the most obvious factor that affects how much a property is worth. Is it close to the city centre? Is it in a sought-after waterfront location? Is it close to public transport, shops, schools and restaurants? People generally want to live close to where they work and where they enjoy their free time, so properties in these areas will be more expensive. Then there’s also the fact that some suburbs simply have a better reputation than others due to factors such as unemployment or crime rates. Two homes just streets apart can differ substantially in value if they’re simply located in different postcodes.
  • Supply and demand. If demand exceeds supply in a given market, property prices will increase. This is because there are more people in the market for a smaller number of properties and the competition to secure a home drives prices up.
  • Interest rates. When the Reserve Bank changes monetary policy, this can affect the value of property. If the Reserve Bank raises the official cash rate and lenders around the country follow suit with their home loan interest rates, the average monthly mortgage repayment goes up. This has a huge impact on property affordability, so there’s less likely to be competition in the real estate market and prices will drop. Conversely, an interest rate cut means it’s more affordable to buy and property prices will increase.
  • Economic outlook. The overall performance of the economy can also have an impact on the property market. If the economy is experiencing strong growth, employment and labour conditions, more Australians can afford to purchase a property, which leads to rising property values.
  • Property market performance. The performance of the real estate market in your local area can also affect how much your property is worth. If there’s little demand for houses in the neighbourhood and the properties listed are selling for well below the asking price, expect values to fall.
  • Population and demographics. The more people who want to live in a particular suburb, the greater the demand for properties in that suburb. At the same time, the type of people living in the area will also influence property values. For example, if young families are the dominant demographic group in the area, multi-bedroom houses will be more sought-after than small apartments.
  • Size and facilities. The features and overall size of a property will also influence its worth. A four-bedroom house is likely to fetch more than a two-bedroom house in the same area, while features such as extra bathrooms, garages, swimming pools and outdoor entertaining areas can all have an impact on property value. In busy cities, the absence or abundance of parking opportunities is another critical factor, while the functionality of a home’s layout is always important.
  • Aesthetics. The street appeal of a property should never be underestimated. First impressions are very important in real estate, so the way a house looks from the outside can instantly add or subtract tens of thousands of dollars from its value.
  • Renovation potential. The potential for growth is important for both homebuyers and investors — the potential to add an extra bedroom or extra storey, the potential to increase the floorspace, or the potential to add a pool or outdoor patio. If there’s scope for a buyer to improve and personalise a property, the re-sale value of that property will increase.
  • Investment potential. The value of a property is also influenced by the potential it presents to investors. Factors such as the rental income an investor can expect from a property and the capital growth they will enjoy when they later sell the property all play their part.
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Bank valuations vs market valuations

When you apply for a home loan, your bank or lender will arrange to have the property you are purchasing professionally valued. But many home buyers are surprised when their bank’s valuation doesn’t match the property sale price.

In many cases, the bank’s valuation of a property will come out lower than its market value. This is because the bank valuation of your property’s value is a conservative estimation of how much a home is worth. Banks need to get an idea of how much they’ll be able to get for your property if you are unable to make mortgage repayments and they must sell the home quickly to pay off the loan. The bank uses this valuation to work out how much it can responsibly lend you and how much money it can reasonably expect to recoup if you default on your loan.

A market valuation, on the other hand, reflects the true value of a property when sold at the right time and under the right market conditions.

Australian property values

During the past 10 years or so, property prices across Australia's capital cities have experienced substantial increases. For example, while the median sale price for a house in Sydney in 2006 was $520,500, that figure cracked the $1 million mark in 2015.

But property prices can rise and fall from month to month, let alone from one year to the next. Figures published in the June Domain House Price Report of 2015 revealed that Sydney house prices had risen 22.9 per cent over the previous 12 months, which was double the increase in the national median house price of 11.7 per cent. But while Sydney’s house prices increased by a massive 8.4 per cent in the June quarter alone, the median house price in Perth dropped by 0.9 per cent over the same period to $605,089.

Keeping an eye on the market trends in your area is the best way to work out how much a property is truly worth as well as the right time to buy or sell.

How to find out the value of your home

If you’re looking to buy a home or sell your current residence, you need an estimate on how much your property is worth.

While online tools can be useful, they won’t give you an accurate quote. Although these services sometimes take into account factors such as the size of the property and recent market trends, there are many other factors that can have an impact on property value, which are not included in the calculations.

With this in mind, the best way to work out the value of your property is to enlist the services of two or three independent agents who can provide a professional valuation. Agents have expert knowledge and experience when it comes to working out property values in your local area, and they can give you a much more accurate idea of the true value of your bricks and mortar.

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