What is the ripple effect, and how does it affect property prices?
The ripple effect, as it relates to property prices, describes how price changes in one key area can propagate outwards and affect the prices in neighbouring locations.
Visualise what happens when you drop a stone into a lake. After the initial splash, ripples in the surface of the water will move outwards from the centre, losing strength the further they get from the initial disturbance.
It’s a familiar image and a great way to picture how increases or decreases in property values are transmitted. The initial “splash” happens in one location – for example, prices start to increase in a desirable metropolitan city – and the effects of that increase ripple out to neighbouring areas.
Why do property prices change in the first place?
Basic economics teaches us the theory of supply and demand. If something is in short supply, and there are lots of people who want it, then people will be willing to pay more for it.
It makes sense that the demand for properties in a vibrant city will be high. A city can offer greater employment opportunities, in turn attracting people to the area. Cities can also be desirable locations for foreign investors who might be looking for relatively safe and stable investment options. If foreign investment in an area is high, this further reduces supply and drives prices upwards.
Of course, property prices can also drop. Uncertainty in the market itself or a lack of confidence in general economic conditions can lead potential buyers to hold off on making purchases. This wait-and-see approach can lead to higher inventory and longer sale times. Sellers can find themselves accepting offers below asking price in order to close the sale. Just as a price increase can ripple outwards, so can a decrease.
Why does the ripple effect happen?
Naturally, many people will want to live close to their place of work and the various amenities afforded by a larger city. Those that can afford the higher prices of being centrally located will be the ones snapping up any available listings.
There will be a significant number of buyers who are simply priced out of that market and, by necessity, must look further afield to find something they can afford.
Another section of buyers will have differing priorities – perhaps seeking they types of properties that simply don’t exist inside cities. Larger homes or properties with large gardens can be more attractive than a central location when it comes time to start or grow a family.
Both sets of buyers will inevitably be looking for areas away from the centre where prices are lower, but will still want good commuting options and transport links, and which still offer many of the amenities of the larger city, albeit on a smaller scale.
Hence the ripple effect – those who can’t afford (or don’t want) the city-centre properties will take a step out to the nearest, most attractive commuter towns. The next segment of buyers might need to take yet another step outwards. And so on, and so on…
However, not just any location will fit the bill. Towns and suburbs boasting good commuting options and access to great public transport links will be desirable to those who need to get to city centres in order to take advantage of the employment opportunities there. Other factors that will increase an area’s desirability will be things like low crime rates, access to good schools and abundant amenities and will be key factors in drawing people to the area.
London, for example, has an established “commuter belt” comprising urban areas such as Southend (pop. 295.3k), Aldershot (pop. 252.4k) and Basingstoke (pop. 107.6k), among many others. These areas are popular with those who want or need to be close to the city, but are seeking more affordable properties, or simply a different lifestyle.