Benefits and Drawbacks of Property Price Increase
Real estate prices increase when economy booms but decrease due to the slowdown of the economy. This is because booming economy creates good paying jobs and purchasing power increases. On the other hand slowdown of the economy decreases the purchasing power and property prices also crash. People hail rising home prices but it is not without disadvantages. This blog describes the Benefits and Drawbacks of Property Price Increase.
Advantages of the Rising House Price:
Real estate transactions are the bread and butter for the realtors. The high property prices means more income for the estate agents. But high property prices also result in the construction boom as more and more investors start the construction of homes. This creates millions of jobs as real estate sector is linked to 50 small industries. So the first benefit of the rising real estate prices is the job creation.
Increase in Revenue
On every real estate transaction, the government collects the taxes. In addition to that there are also annual property taxes depending on the price and size of the property. Real estate sector is a great contributor of the national GDP in advanced countries. The tax collection is always fixes like certain percentage of the property value. Greater the property price, higher will be the tax collection. So the second benefit of the rising home price is the more revenue collection.
Wealth of the Landlords Increases
Investing in real estate sector is generally considered very profitable. Most self-made billionaires gained the wealth by investing in real estate. This is because real estate performs better than other investments. The rise in property price increases the wealth of the landlords. This increase encourages the people to own properties as this is the quickest way to become millionaire. So the third advantage of high property prices is that wealth of the home owner increases.
Disadvantages of the Rising House Price:
Risk of the Economic Meltdown
The first disadvantage of rising house price is the slowdown of the economy. The high prices make homes un-affordable and less people apply for the mortgages and bank loans as they have to save more for deposits. Another factor is that every housing boom is followed by a crash due to which foreclosures increase. All these factors slowdown the economy while kick starting the recession.
Home Ownership Declines
The second disadvantage is the decline in home ownership. Some people buy homes with cash whereas others with mortgages. In both cases when property price increases people can’t afford to buy homes. This is because they need more cash to buy homes and also need to save more money for the deposits. Therefore home ownership decreases with the rise of property price.
Hard to Pay the Rents
House rent depends on its value. When house price is affordable, the rents are also affordable. But when house price is high so are the rents. Most people spend up to fifty percent of their monthly incomes on rents. Due to increase in house price, monthly rents also increase. This makes the rent payment difficult for many people. So another disadvantage of high house price is that people struggle to pay the rents.