Explained: The science behind property prices

May 7, 2021 / Isla MacFarlane
Explained: The science behind property prices

Mark Shepherd, Course Director for the University of Manchester’s blended online MSc Real Estate course, explains what really governs the property market.

The UK has a love affair with bricks and mortar. This line – or something to that effect – is widely used. But it is perhaps a little misleading.

Property is ubiquitous; everyone needs somewhere to live, whether that is a property they own or one they rent. As such, it is a given that the media will be awash with stories about property values, rental prices and the latest trends that are governing the market.

However, it is important that we peel away the layers and delve beneath the headlines. After all, there is so much data published about the average house prices – the ONS, Zoopla, Rightmove, Halifax and Nationwide all have their own indices published each month – that one can easily become fixated on figures without having a deeper appreciation of the fundamentals that shape property markets on a macro and micro level.

In the context of Covid-19 and the significant changes we have seen across the UK property market, now is an opportune moment to take stock and address these fundamentals.

The fundamentals of property markets

Whether taking a national or regional view, property markets are incredibly diverse. So, we must begin by remembering the different players that are active in this space, as well as the core features of property that makes it unique to other assets or markets.

The players

There are owners; those own and occupy a property. There are renters; tenants in a property owned by another individual or organisations. There are investors; those who own but do not live in a property. There are developers and renovators. And there and facilitators; those who are involved in the transacting of property, such as agents, lawyers, governments and lenders.

This is an important starting point. It is too simple to say the market is governed by supply and demand – the actions of any of these groups will have a significant impact on the others, and indeed on the market as a whole. The UK Government’s introduction of the stamp duty land tax holiday in July 2020 is a prime example; this action by the state has triggered a surge in buyer and seller activity over the past nine months.

Immobility

There is another watchword we must consider: immobility. It might seem like an entirely basic point, but we must consider that a property or piece of land cannot be moved – it exists in a single, permanent location.

The immobility of property is fundamental in explaining broader market trends. For instance, during the Covid-19 pandemic, data has shown that British homebuyers are increasingly leaving towns and cities in favour of rural areas. This is an issue: buyers headed to the countryside, but the highest volume of housing exists in urban locations, meaning there becomes an acute shortage in supply. The longer-term result might be that more investment is ploughed into rural areas to enable more constructions, conversions and renovations.

Costly, lengthy transactions

Compared to other assets, property transactions are both costly and lengthy.

Current data shows that it takes almost 200 days for the sale of a residential property in the UK to move from instruction to completion. Further, fees will often total thousands of pounds for both buyers and sellers, and that is before additional tax implications are brought into the equation.

The cost and time of transacting property varies from country to country. But the process is an important factor in shaping the market.

The science and art of property valuations

Returning to my earlier point, there is something of a fixation on property prices, not just in the UK but globally. Again, though, is there enough focus on the valuation process itself?

Property valuation is both an art and a science. The science element comes from the application of different mathematical techniques and a structured approach to data analysis. The art element comes in the exercise of professional judgement based on market knowledge and experience.

Naturally, valuing real estate in the commercial sector varies significantly from residential property. But there are notable different between commercial properties, too.

Take a shop unit, for example. Its value will be determined by factors linked to its location – footfall, catchment area, accessibility, and so forth. There are then further legal considerations, such as the financial stability of the tenant, the terms of the lease, and the overheads like tax and insurance. There are dozens are factors that come into play; it requires skill, experience and a lot of market data to reach an accurate valuation.

With the UK property market being such a hive of activity at present, it is easy to be distracted by headlines and figures such ‘average house price values’, which are often problematic. I actually believe that the pandemic has underlined why formal qualifications – for example, globally recognised professional designation such as being a Member of the Royal Institution of Chartered Surveyors (MRICS) – are so valuable in this industry.

By refining their skills and establishing the fundamentals that shape global property markets, real estate professionals will be in a stronger position for turbulent periods such as the current pandemic.

Mark Shepherd is the course director for the University of Manchester’s blended online MSc Real Estate course. Covering valuations and appraisals, development, management, and investment, the two-year Masters is designed to help people get into and move up within the world of real estate, providing students with an in-depth understanding of how the sector functions and the fundamentals that govern it.

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