Factors that cause a drop in property value

Whether you’re buying or selling a property, the main question is how much is the property really worth? From supply and demand through to location, amenities, and desired infrastructure projects, there are plenty of factors that can influence property value. Read on this guide by Four Winds Saudi Arabia to find out what can increase the prices on properties, as well as the factors that cause a drop in property value and how you can find out what your home is worth.

First, let’s start with conditions that affect property value

1. Location, location, location

The location of a property is the most common factor that impacts the worth of a home. Is your property close to the city center? Is it in a very popular waterfront location? In that case, you need sea freight from China to Saudi Arabia! Factors that cause a drop in property value include whether or not it’s close to public transport, shops, schools, and restaurants. That’s basically a rule because people generally want to live close to where they work and where they enjoy their free time. So properties in these areas will be more expensive. Then there’s also the fact that some areas simply have a better reputation than others because of the unemployment or crime rates. Note that two homes just streets apart can differ significantly in value if they simply have different postcodes.

Money in a case
You may have a harder time selling your home at the current list price. 

2. Supply and demand

If demand surpasses supply in a given market, property prices inevitably increase. This is a consequence of the fact that there are more people in the market but a smaller number of properties. And according to the national shipping company of Saudi Arabia, that competition to secure a home is what drives the prices up.

3. Interest rates are some of the main factors that cause a drop in property value

What is the property value? When the Reserve Bank makes an alteration in the monetary policy, this can affect the value of the property. If the Reserve Bank increases the official cash rate, the average monthly mortgage repayment increases as well. This is one of the factors that cause a drop (or arise) in property value. As a consequence, there’s less likely to be competition in the real estate market in Riyadh and prices will drop. Along the same lines, an interest rate decrease means it’s more affordable to buy and property prices will rise.

Here are three major threats that cause a drop in property value

As a property investor, you should constantly be informed of the value of your property at all times. Certain factors that cause a drop in property value. Some of these factors, such as natural disasters, are out of your control. So here’s all our insider information on this topic.

A natural disaster such as this slide is one of the factors that cause a drop in property value
Natural disasters will damage your existing property. If you have insurance, you will usually get some money to pay for the damage, but it is rarely enough.

1. Increasing Mortgage Rates

When mortgage interest rates are low, buyers can afford to spend more on a property. At lower interest rates, their monthly mortgage payments will be lower, and they will pay a smaller amount over the life of the loan.

  • As interest rates rise, that can cause a drop in property value for potential buyers. They can no longer afford to spend as much on the initial purchase price.
  • Now that the interest rates have increased, their monthly mortgage payments will be higher and they will have to pay more over the life of the loan.
  • The mortgage rate skyrocketing not only affect home buyers, but they affect sellers as well. Your property is not as valuable because people have to pay more to buy your home at higher rates. Before the interest rates increased, maybe you had 30 prospective buyers. With the higher rates, this number may have fallen to only 10 prospective buyers.

2. Natural disasters are major factors that cause a drop in property value

Mother Nature is oftentimes one of the most serious factors that cause a drop in property value. We are not talking about the occasional heavy rainstorm or three feet of snow. We are referring to natural disasters that can wipe out entire communities. Examples of natural disasters that can severely damage or completely wipe out your property’s value are hurricanes, tornadoes, wildfires, earthquakes, tsunamis, mudslides, and floods.

  • Just as a comparison, remember Hurricane Katrina that struck the Gulf Coast in 2005. It left almost 2000 dead and caused more than $81 billion in property damage. Another sad example is the F-5 tornado that struck Joplin, Missouri, in 2011. It left 158 dead and caused about $2.8 billion in property damage.
  • When you bought your home, flood insurance may not have been mandatory. One hurricane occurrence is enough to cause serious flooding in your town. The flood zone maps would then be updated and suddenly require you to have flood insurance. This factor will significantly impact the value of your home because people will be hesitant to buy property in a flood zone. You can apply for aid from FEMA, but it is usually hit or miss with whether you will qualify for this benefit.
Firefighter in front of a pile of rubbish
These natural disasters can strike without warning and can completely devastate an area.

3. Foreclosures/Short Sales

Another threat to the value of your property are foreclosures and short sales in your area. These affect your property value by lowering the comparable sales in your neighborhood.

  • For example, you have a 3 bedroom, 2 baths, 1500 square foot home. One comparable home sold for $350,000 and another sold for $340,000. A third home was foreclosed on, and it sold for $200,000. This foreclosure affects the comparable prices by significantly decreasing the price of your property.
  • What when these foreclosures are not direct comparables? They may not have the same square footage and the number of bedrooms and baths. But if they are in your immediate neighborhood, this can make the entire area depreciate in value.

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