Factors Affecting Property Prices

Nov. 22, 2019, 8:57 a.m.

Conventionally, housing had a different shade of meaning and perspective. It was all about living spaces and roofs over heads. 
Nowadays, it’s a completely new ideology when it comes to housing. What was once perceived as a decent dwelling is now an item that shares similar characteristics to Lego toys - build according to instructions in the pamphlet or let your imagination take over.

Where once you did not worry about zoning rights, now you are confronted with different personas with papers and ID cards in hand, breathing down your neck to ensure proper processes have been adhered to.

Then there’s the issue of high property prices. 




(Image by Studio Workshop, Port Moresby)

 

A recent article by post-courier titled “Port Moresby Becoming Too Expensive” (November 15, 2019), represents the plight of many whose concerns are laser-focused on affordable accommodation and the property law system in PNG.

The article further explained that developers and homeowners shared similar sentiments, to which purchasing real estate qualified as a tricky business. Moreover, the view that property prices are quite high in Port Moresby than other major centers such as Lae and Madang, is common knowledge.

Post Courier also cited the Hausples 2019 Real Estate Sentiment Survey to affirm this notion. In the survey, the newspaper gave particular emphasis to:

 

Rent or own?

“Comparing the proportion between renters and buyers indicate that the market in PNG is maturing. Seventy-one percent of those taking the survey said they are renting their property. While this is the majority, it is down from 74% last year and 76% in 2017.

Ownership, on the other hand, rose hugely. Almost 16% said they owned a property in full. Nearly 13% said they owned with a mortgage, which is up from 10% last year.”

 

Property type, location and budget

“When asked what kind of property they wanted to rent, the majority, surprisingly,  said they would prefer an apartment, a significant increase compared to previous years.

However, hi-set houses are by far the most desired properties to purchase, with nearly half of all respondents preferring this style of living.

What is more, the desire for house rentals has dropped to just 40% against last two years' figures of 58%  

From a location perspective, there was a big increase in demand for land outside of suburban Port Moresby. 8-Mile and 9-Mile saw the largest increase in location preferences, possibly due to cheaper land pricing and improved roads.”

 

Affordability

“Around 60% of respondents claimed that property is “very unaffordable” in PNG. A further 27% said property here is “moderately unaffordable”. These numbers are nearly identical to where they stood last year.”

 

(Image by Century21 Siule Real Estate)

 

In an attempt to address the issue, Post Courier noted that the PNG government rolled out affordable housing programs, including the First Home Ownership Scheme; with the aim of improving household’s access to housing, as well as sustaining their wellbeing.

While this is currently true, Hausples went ahead with its own fact-finding in order to clearly explain a few factors that impact property prices.

 

Let’s take a look at 9 of these factors:

 

1. Supply And Demand

Supply and demand simply go hand-in-hand in influencing property prices. Prices go up when demands are high but the supply is low. The opposite is true. Ironically, in the real estate market, there’s rarely an equilibrium between supply and demand. 

So as far as affordable housing is concerned, not once has supply exceeded demand, which is why the prices tend to increase.

 

2. Economic Growth

When it comes to economic growth and the housing market, demand for housing is centered around income. A continuous growth of the economy results in a rise in income. This constitutes people’s ability to spend more on housing, in tend giving rise to demand and property prices. 

In England, for instance, demand for housing is often noted as income elastic (or a luxury good). In other words, an increase in income often leads to a substantial percentage of the income used on housing. 

 

3. Consumer Confidence

A determining factor in considering a mortgage to purchase a property is consumer confidence, in terms of whether or not people are able to take the risk of buying the property with a loan.

Found under Finances in the 2019 Real Estate Survey, “over 80% of respondents in our survey said they would require a mortgage to finance their property purchase.”

In reality, the overriding element here is the expectations toward the housing market - if consumers fear a drop in house prices, they will defer the buying process.

 

4. Location, Location, Location

A house located near a beach front, within a CBD or few minutes from major public transport tend to be priced higher.

With the vastness of PNG as a whole, you will find that a majority of the well developed areas are in close proximity or within major CBDs.

This is another contributing factor towards a price increase for a property. Naturally, people want to be close to shops, public transport, entertainment hubs and their places of work, and that’s when things start to get interesting. As the demand for more houses in these areas increase, so does the property prices.

 

5. Security

Again, in the 2019 Real Estate Show Survey, under 4.1 Affordability, you will see that security has a significant impact on property prices. 

It goes without saying that people who are in the market to buy new homes often spend much of their time immersed in the physical configuration and overall outlook of the property, that they give little to no attention to how safe the neighborhood is. 

In actual fact, the security element of a property shares equal importance with every aspect of the property that increases value, than just how good it looks on the outset.

 

6. Interest Rates

An increase in interest rates signals banks and financial institutions to increase the cost of loan repayment variables. 

High interest rates turn a home buying experience into a lost cause. A slight change in interest rates often has a drastic impact on whether or not buying a house is economical. Homeowners who bought the property on loan are familiar with this trend. 

 

7. Cost Of Building Materials

In a recent study conducted by Associate Professor Eugene Ezebilo on the Dynamics of Housing Price In Port Moresby, cost of building materials was noted as one of the influential factors in increasing a property’s value. This may be due to costs associated with transportation and importation of these materials, consequently impacting the value of a property. 

That said, two points come to mind:

  1. Low Kina value - means higher costs associated with imported goods

  2. Lack of foreign exchange - means a company’s ability to make payments overseas is limited. 

 

8. Additional Expansions

The extent to which a property is able to be expanded to allow for new inclusions is a key element in determining the value of a property. This is where the options of turning the property into a storeyed accommodation, or building additional bedrooms, or transforming the spacious front yard into a tucker shop. In other words, increasing a property’s floor area adds weight to the cost of a property.

 

9. Unique to Papua New Guinea

Another factor that drives up the pricing of housing in PNG is the additional resources required for a developing country. Power and water are often inconsistent and requires backup generators, water tanks and pumps; all expensive investments which require ongoing maintenance. 

Once more, security enters the scene here. A typical PNG home is surrounded by fencing, often decorated with razor wire, plus the provision of security guards which can push up rental prices by a factor of 3.

 

The Bottomline

“If someone is going down the wrong road, he doesn't need motivation to speed him up. What he needs is education to turn him around.”

  • Jim Rohn

 

Armed with the knowledge and understanding of how properties are priced and the reasons for it, gives investors a better position to make a sound and informed decision in their preparation to secure a new property on the market.

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