UK HOUSING MARKET

UK Housing Market

UK Housing Market

Introduction

Many first-time homeowners and experienced real estate investors seem to focus on the functionality and style of their proposed purchases, expecting these characteristics to lead to increased property value. Many fail to remember the slogan of the real estate industry - "location, location, location" - when trying to find the property that will lead to the greatest investment performance.

Examine the factors that determine the price of houses in a free market. How and to what extent could government policies affect house prices?

The reality is that the physical structure actually depreciates over time. It is the land underneath the structure that appreciates in value. This is a significant distinction, considering that the purchase of a home is the single greatest investment that most retail investors will make in their lifetimes. Failing to look at one's home as an investment and understand the drivers of value, or concentrating on functionality and accommodation, can limit the property's overall performance and opportunities to maximize wealth.

Making the distinction between the improved portion of a property and the land on which it sits may seem trivial. But it is not until the real estate investor focuses on these differences that it becomes easier to find more efficient investments that provide the highest return for the amount of risk or capital invested. Because property prices are a function of local supply and demand, the appearance, functionality and maintenance of the physical structure will certainly impact value, but these factors have less impact than one may think. Understanding how location and the future prospects of land values influence property returns allows investors to make better choices between competing assets.

The reason that land is an appreciating asset is a simple one. It is in limited supply, and no one is producing any more. The demand for land is constantly growing as the population increases, and since its supply is limited, its price must increase over time. Unless something happens to limit demand for a given area or make it unusable, the grounds should be expected to increase in value over time.

The question is how much the land will appreciate and how much the improvements will enhance or degrade overall value. The physical structure on a property is a depreciating asset. As it ages, it requires capital infusions for maintenance, updating to stem functional obsolescence and, depending on its design, updating to prevent it from falling out of style. Even the Internal Revenue Service (IRS) acknowledges this fact by allowing depreciation of the physical structure for tax obligations. The land underneath the structure, however, is not depreciated.

The degree of depreciation or physical obsolescence will be specific to each property, but it is fair to say that if left alone, a property will continue to lose value until it no longer adds value to the land, or even reduces its value. Some land parcels with inferior structures, as compared to the surrounding properties, will actually be worth more ...