Priya Patel, a 5th-year Law Student specializing in Corporate Law at the School of law, Lovely Professional University has written this blog explaining “Real Estate Price Escalation”.
INTRODUCTION
It is not uncommon that multiple offers frequently arrive for sellers in a rising real estate market. And escalation here states that in a real estate contract, if the seller receives a higher competing offer, a potential buyer is willing to increase their offer on a home. Also, it specifies the buyer’s spending limit and how much more they are willing to pay than the highest offer, and how far they are willing to go to acquire it. [1]
Real estate prices have been on the rise for several years now. It doesn’t seem like they’re going to stop anytime soon. The escalation of real estate prices is a significant concern for individuals, families, and governments worldwide. In this blog post, we will discuss the reasons behind the escalation of real estate prices, its impacts, and some potential solutions to this problem.
LEGAL FRAMEWORK
The legal framework surrounding real estate price escalation is complex and varies from country to country. However, in general, real estate prices are influenced by a number of factors. It includes supply and demand, interest rates, inflation, and government policies. In many countries, the government has the power to regulate real estate prices, either through direct intervention or by creating policies that encourage or discourage investment in the sector.
One of the most important aspects of real estate regulations is zoning regulations. Zoning is the process by which local governments divide the land into different categories and establish rules governing what can be built in each area. Zoning laws can have a significant impact on real estate prices. As they limit the supply of available land for development and can create artificial scarcity.[2]
Another important legal aspect is property taxes. Property taxes are typically based on the assessed value of the property, which is often determined by an appraisal. Higher property taxes can discourage speculation and encourage long-term ownership of the real estate. Additionally, property tax revenue can be used to fund affordable housing initiatives and other programs designed to mitigate the negative impacts of real estate price escalation.
In some countries, rent control laws are also used to regulate real estate prices. Rent control is a policy that limits the amount that landlords can charge for rent, typically by tying rent increases to inflation or other economic factors. Rent control can help to ensure that housing remains affordable for low-income families. It can also discourage landlords from investing in their properties and may lead to a decrease in the supply of available housing.
In addition to these legal frameworks, there are also laws governing real estate transactions. Such as property transfer taxes and stamp duties. These taxes are typically charged when property ownership is transferred from one party to another and the revenue generated can be used to fund affordable housing initiatives or other programs designed to address the negative impacts of real estate price escalation.[3]
Overall, the legal framework surrounding real estate price escalation is multifaceted. Zoning regulations, property taxes, rent control laws, and transaction taxes all play a role in shaping the real estate market and determining the prices of properties. As the issue of real estate price escalation continues to be a significant concern in many parts of the world, it is likely that governments will continue to explore new legal frameworks and policies to address the problem.
REASONS BEHIND THE ESCALATION OF REAL ESTATE PRICES
- Increased Demand: One of the primary reasons behind the escalation of real estate prices is the increased demand for property. The population is continuously growing, and more and more people are looking for a place to call home. Additionally, with the increase in income levels and improved lifestyles, people are now looking for better and more comfortable homes. The rise in demand leads to an increase in real estate prices.
- Low-interest rates: Another reason for the escalation of real estate prices is low-interest rates. In most countries, the central bank sets the interest rate, which affects mortgage rates. Low-interest rates make borrowing easier and more affordable, which increases demand for homes and drives up prices.
- General Inflation Lastly, building new homes costs more money each year. This is due to the rising costs of inputs like steel, cement, and skilled labor on an annual basis. As a result, general inflation causes property prices to rise. The homeowner is actually losing money in real terms if the nominal price of the home does not rise by 2% to 3% annually. This is on the grounds that the expense of land isn’t increasing at a similar rate as expansion is![4]
- Speculation: Real estate is often seen as a safe investment option. Investors buy properties, expecting their value to appreciate over time. This speculation increases the demand for real estate and drives up the prices further.[5]
IMPACTS OF THE ESCALATION OF REAL ESTATE PRICES
- Unaffordable Housing: The escalation of real estate prices makes it difficult for first-time buyers to enter the market. This, in turn, affects the economy’s growth as people spend more of their income on housing, and less disposable income is available for other spending.
- Income Inequality: The escalation of real estate prices also contributes to income inequality. The rising prices benefit the property owners, who are often already wealthy while making it difficult for low-income families to afford to house.
- Increased Debt: The escalation of real estate prices increases the debt burden on households. With high prices, homebuyers need to borrow more money to buy a home. This increases the debt burden and can lead to financial distress.
- Economic growth: Real estate development and investment can contribute to economic growth and job creation in construction and related industries. However, if real estate prices rise too quickly, it can lead to a bubble that eventually bursts, causing economic downturns.[6]
POTENTIAL SOLUTIONS TO THE ESCALATION OF REAL ESTATE PRICES
There are several possible solutions to the problem of real estate price escalation. One solution is to increase the supply of housing. Governments can do this by easing zoning restrictions, providing subsidies for affordable housing, and incentivizing developers to build more homes. Additionally, encouraging alternative housing options such as co-housing, tiny homes, and modular housing can provide affordable housing solutions for low-income families and reduce demand for traditional housing.
Another solution is to increase interest rates. Central banks can increase interest rates to make borrowing more expensive, which can help to cool down the demand for housing and lead to a reduction in prices. Governments can also increase taxes on real estate to discourage speculation and generate revenue for affordable housing initiatives.
CONCLUSION
In conclusion, the escalation of real estate prices is a complex issue with significant impacts on individuals, families, and communities. The reasons behind the escalation are multi-faceted, and potential solutions are equally complex. While rising prices can provide benefits to property owners and contribute to economic growth. They can also exacerbate wealth disparities and make it harder for people to access affordable housing. However, it is essential to consider the potential long-term consequences of real estate price escalation and find sustainable solutions that balance the needs of property owners, potential buyers, and the wider community.
Also Read: RERA – Its Implementation & Its Impact on Various States. Click Here!
[1] What Is An Escalation Clause And When Is The Time To Use One?, Available at:https://www.rocketmortgage.com/, (Last Visited on 23 March , 2023).
[2] Types of land use in India: All you need to know, Available at:https://housing.com/, (Last Visited on 24 March, 2023) .
[3] General Aspects of Real Estate in India & Key Regulatory Framework, Available at:https://samistilegal.in/, (Last Visited on 23 March, 2023).
[4] Five Reasons Why Real Estate Increases in Value,Available at:https://www.managementstudyguide.com/, (Last Visited on 25 March, 2023).
[5] 4 Key Factors That Drive the Real Estate Market, Available at:https://www.investopedia.com/, (Last Visited on 25 March, 2023).
[6] Factors that affect the housing market, Available at:https://www.economicshelp.org/, (Last Visited on 26 March, 2023).
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