Real estate is most likely the most significant investment that is in the portfolios of every family around the world. The majority of middle-class households invest the most amount of money into their homes. In many areas of the world, this notion has been bolstered by the fact that homes have increased exponentially in value. Stories of 100-fold increase over 50 years or more aren’t unheard of. But, it is important to keep in mind that this is not even close to an exceptional amount of money. Even if the property increased 100 times in just 50 years, the annual growth rate is not more than 10 percent! It’s the lack of knowledge about the mystical effect of compounding that causes people to chase after real estate blindly.

The key point is that people examine previous data regarding real estate and anticipate that the trend will continue. This implies that they believe that in the coming 50 years, price of property will rise by a factor of 100. This could be true or not be the case depending on the location of the property.

In this article, we’ll explore the main factors that fuel the development of real estate.

Factor #1: Zoning Laws

One of the main motives for price changes within the property market is the alteration in the zoned land. For instance, fifty years ago, the population was not as high as it is today. Thus, a lot of land was destined for use as agricultural land. Land used for agriculture does not have the same value commercially. This is why the costs of this land were less.

In the end, if the zoning laws change, and the land is permitted to be utilized for commercial as well as residential uses the worth of the land will increase. Much of the increase in the last fifty years has been because of modifications in zoning laws. This is especially true for areas that border megacities. As time passes, cities tend to expand in size, and as a consequence, the land that is surrounded by the cities is likely to be valued. However, some cities in all over the globe have grew far too much. It is highly unlikely that they will have to face further growth in the near future. Therefore, what has been happening in the last 50 years might or may not happen again in the coming 50 years.

Factor #2: Infrastructure Development

If commercial and residential construction is permitted on a specific plot of land, the development of infrastructure should also begin. New roads must be constructed. Additionally, the quality of life is enhanced when hospitals, markets and schools are constructed close to. The development of infrastructure takes an extended period of time. The process could last for about 10 years. However, if the changes occur continuously, the cost of land will continue rising.

Factor #3: Workplace Connectivity

People are tired of long commutes. They don’t get compensated for their spend on their commutes. But, it is a waste of precious hours in the daytime. Therefore, young people prefer staying in an area that is close to their workplace. In turn if a place is located near work, then it begins selling at a higher price. The move of business districts in central areas to the outskirts of a number of cities has led to the potential for price increases in these regions. But today, people don’t buy large tracts of land. Instead, they purchase developed properties. This means that a large portion of the value that is accrued due to the connectivity of offices is repaid to the developers themselves. The cost at which a property is sold usually takes into account the development that is that is likely to occur in the near future. In the end, individuals investors aren’t really able to gain anything to gain by the increased connectivity.

Factor #4: Network Externalities

When a place becomes popular among residents, it can become an ideal location for a variety of social events. Hobby classes, restaurants, shopping malls, multiplexes etc. begin operating in the area. This is in line with the lifestyles of a large number of people, and the homes on the residential market are sold at a higher price. The more developed a city gets the more people are looking to live there, and the prices keep rising.

Factor #5: General Inflation

In the end, homes become more expensive to construct every year. This is due to the cost of the inputs such as steel, cement, and skilled labor rise each year. This is why general inflation causes properties to become more expensive. If the price nominal of the home isn’t growing by 2% or 3percent every year, that means the homeowner is actually losing funds in real dollars. The reason for this is that inflation rate is increasing, while the value of the property isn’t!

• A variety of econometric models are employed to determine the index’s final value. The value could be biased because of personal interests. But, in the majority of instances, the information is accurate and fair.
• This approach is utilized across Scandinavian states, Switzerland, United Kingdom and even India. It is also used in India. National Housing Board Residex Index was developed following similar principles.

The fact is that various techniques can be employed to make real estate indexes. The decision is based on the quality and availability of the data. It is also evident by this post that residential indexes are very different when compared to other indexes.