INTRODUCTION
Real estate pricing is a complex interplay of various factors that shape the value of properties in any given market. These factors, ranging from supply and demand dynamics to the intrinsic characteristics of a property, collectively contribute to the process of price discovery.
This article explores the key elements influencing real estate pricing and delves into a unique challenge faced in Africa, shedding light on the escalating land prices and the underlying reasons behind this phenomenon.
Understanding these factors is crucial for anyone involved in the real estate market or interested in its dynamics.
WHAT IS REAL ESTATE PRICE DISCOVERY?
Real estate price discovery is a complex and dynamic process that determines the fair and accurate value of a property or real estate asset.
In real estate transactions, this complex interplay of quantitative and qualitative factors guides buyers, sellers, and industry professionals toward informed decisions on property values.
The market’s uniqueness for each property adds intricacy to price discovery compared to other markets.
FACTORS AFFECTING REAL ESTATE PRICE DISCOVERY
Supply and Demand: The core of real estate price determination relies on the basic concept of supply and demand. The relationship between these two factors establishes the foundation for pricing trends. If there is a higher demand for properties in a specific location than the supply available, it generally leads to rising prices, creating a favourable environment for sellers and vice versa. This equilibrium between these forces can vary, influenced by a range of economic, demographic, and environmental factors.
Comparable sales: Real estate professionals rely heavily on the concept of comparable sales to accurately assess the value of a property. By examining recent sales of similar properties in the same neighborhood, they establish a reference price that gives a valuable idea of a property’s value of a property. The comparability of these sales goes beyond the physical attributes of the property and encompasses variables such as location, amenities and market conditions.
Location: The precise positioning of a property, its proximity to schools, public transportation, shopping centres, and overall neighbourhood desirability can substantially influence its value. Often, two seemingly similar properties can exhibit significant price disparities solely due to their locations.
Property Characteristics: Elements such as square footage, layout, condition, age, architectural style, and any unique features it may possess all factor into a property’s market value. A meticulously maintained, updated property with desirable features will typically command a higher price than one in disrepair or with less appealing attributes.
Market Conditions: Real estate operates within the broader context of economic conditions and market sentiment. Factors such as interest rates, unemployment rates, and the overall health of the economy significantly impact real estate prices. In a robust and optimistic market, prices tend to rise, whereas, during a recession or economic downturn, prices may experience downward pressure.
REAL ESTATE PRICE DISCOVERY IN AFRICA
There is a unique issue prevalent in Africa, particularly in West Africa, where individuals are purchasing undeveloped land and then reselling it at a significantly higher price. With each subsequent sale, the land’s value continues to rise to the extent that undertaking a financially viable project on that land becomes nearly impossible. This implies that the land’s cost as a percentage of the total cost of the project escalates to a point where profitability is unattainable for any project.
The above-mentioned issue is most prevalent in West Africa where rising land prices are causing distress among many. The escalating prices of land are often attributed to land speculation and its scarcity, a view shared by both experts and the public. While speculators play a role, solely blaming them is a basic analysis that overlooks other aspects of the problem. Another less-discussed factor is the inflationary nature of real estate transactions in Africa. Even if the government banned capital gains on real estate and eliminated speculators, prices would still surge due to the inherent inflationary tendencies within these transactions. Essentially, transaction costs also contribute to the rising prices.
In Africa, real estate serves both speculative and basic housing needs. Tax policies should consider this duality, aiming to ease the tax burden for those seeking homes and thereby reduce the transaction costs. Expanding notary involvement in all real estate transactions can enhance transparency, reduce disputes, and promote economic formalization, provided the number of notarial offices increases significantly.
CONCLUSION
Real estate price discovery is complex and influenced by factors like supply and demand, location, and market conditions. In West Africa, rising land prices pose challenges due to speculation and scarcity.
To address this, tax policies should accommodate the dual role of real estate, reducing taxes for home seekers and cutting transaction costs. Expanding notary services can enhance transparency and formalize the economy, but it requires more notarial offices.
