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Housing Price Effects on Local Economy and Social Welfare Research Paper


Introduction

The financial market of the whole country and a particular region largely depends on such a factor as a price policy in relation to real estate. Depending on the cost of housing set by both government agencies and private owners, a common economic background is formed. The prerequisites for raising or lowering prices for this product are invariably connected with the financial capabilities of consumers, and a large range of conventions are usually taken into account, for instance, the year of construction, exclusivity, and other criteria.

At the same time, both the low and high cost of housing are the factors that are considered by fund players, governments, local authorities, and ordinary citizens. Both national and regional treasuries are primarily replenished through the sale of housing, and based on prices, such an essential social indicator as the welfare of the population can be calculated.

Despite the objectively expensive cost of housing in major cultural, business, and entertainment world centers, there are always those buyers who allow property sellers to regulate pricing in accordance with personal interests. As an example of a specific location, such a metropolis as New York can be considered from the point of view of the housing prices effect on the city’s economy and its citizens’ welfare. In this case, not only new buildings are regarded but also historical housing, which sometimes costs more than new constructions.

According to Been et al., “nowhere in the United States have the debates about historic preservation received greater attention than in New York City” (19). This fact proves that the real estate of any type is an actual topic for discussion in this one of the largest American cities. The influence of the price policy of real estate on the local economy is significant, which invariably affects the level of citizens’ welfare.

Factors Affecting the Price of Housing

Today, the residential real estate market is one of the most dynamic segments of the financial sector. Its cost is the indicator that substantially reflects an economic and social situation in a particular region since housing is one of the basic needs of a person. Reasons for different prices for real estate in cities and countries can differ depending on various factors. An unfavorable climate, stagnation, political instability, a decline in investment in the manufacturing sector, an increase in tax pressure, low consumer spending, a drop in interest on bank deposits and mortgage loans of commercial banks, inflation, and other reasons can affect prices.

The formation of prices in the real estate market is influenced by external and internal factors. External criteria can be macroeconomic, microeconomic, and social ones (Mian et al. 2622). Macroeconomic factors characterize the economic conditions in the country and include such parameters as gross domestic product (GDP), inflation rate, financial instruments yield rates, people’s incomes, the employment level of the able-bodied population, consumer price index for goods and services, and the state of the trade balance.

According to Mian et al., in the conditions of an equilibrium market and a stable economy, the growth in property prices is formed by the amount of the inflation rate of the national currency and the rate of GDP growth (2622). If the effect of macroeconomic factors is relatively stable, the state of the real estate market is determined by microeconomic factors that describe a financial situation in a particular region. The social conditions of a certain district are characterized by the following factors: migration flows, the proportion of the able-bodied population in the total number of people, a demographic situation, and the unemployment rate in the region.

The internal factors of the real estate market include institutional criteria, market dynamism, the supply-demand ratio, the differences of prices of the primary and secondary market, information security, and the openness of the market (Adelino et al. 292).

The deterrent factor for the development of this financial sphere is not only the low wages of a wide range of highly qualified specialists engaged in social services but also the general tendency for the educational level of the population to decline. This trend, on the one hand, indicates a reduction in the population as a whole, and on the other hand, it speaks of an increase in the number of citizens who do not complete a comprehensive school. Reduction in the commissioning of education facilities may be attributed to negative trends in the development of the local economy and, as a consequence, the real estate market.

At the same time, it is impossible to assert that only the aforementioned indicators affect the cost of housing. The price of real estate is also the value that regulates the financial flows of regions and countries in a certain way and forms a distinctive market background. Thus, it can be noted that the cost of housing directly affects the economy, which is reflected in the banking sector of lending and budget financing.

Impact of Housing Prices on Economic Indicators

When evaluating the impact of housing prices on the local economy, some correlations can be made. For example, in case the cost of real estate is high, certain advantages may be obtained by the state. If the consumer capacity is stable and people are ready to pay money for elite housing, the government can count on potentially large income from tax collections and thereby formulate the budget in accordance with these conditions.

The owners of the private real estate have an opportunity make a big profit by selling such property, which is also beneficial for the treasury. Moreover, as Mian et al. note, high demand for housing can also affect such an essential economic factor as the unemployment rate (2589). A large number of jobs in the construction sector can help the state at least partially solve the issue of employing citizens, which is particularly relevant in the conditions of labor market congestion.

At the same time, the low cost of housing can also have significant implications for economic development. The state and the local treasury will not be able to receive high profits through direct sales. Demand for this product will be high, which will create high competition among property owners, both private and public. It, in turn, will affect credit rates since the population will be more willing to take out loans, and the banking sector may receive substantial dividends.

According to Loutskina and Strahan, the mortgage system will be more developed and in demand in the conditions of the availability of housing, and subsequently, the state treasury can be enriched at the expense of this sphere (26). Therefore, in both cases, revenues can be significant, and it is essential to monitor the level of customer interest and sales volumes so that all interested parties could be satisfied.

Impact of Real Estate Prices on Social Welfare

When considering the possibility of obtaining education, cultural, sport, and creative development, one of the primary factors that allow a person to acquire knowledge is the location of his residence, for instance, remoteness from the main centers, and housing conditions. Also, the criterion affecting the delivery of quality medical care is citizens’ residence, that is, the location of medical centers and clinics near homes.

Serious impact on human health is provided by housing, environmental, climatic conditions of his residence (Adelino et al. 289). The lack of personal real estate does not allow people to feel safe. Thus, particular attention should be paid to the issue of housing acquisition and the achievement of an appropriate level of living conditions since these criteria influence the necessary minimum level of social guarantees and welfare.

From an economic point of view, the level of well-being of the population can also depend on the prices of real estate because an opportunity to acquire good and affordable housing is the indicator of welfare. According to Ansell, “assets such as housing provide a stock of wealth independent from the dynamics of the labor market” (384). In case the cost of real estate is too high, well-off citizens solely will be the main customers of this market, but a large percentage of the population will have to rent housing and experience a constant need for funds. While considering a situation when almost every family can afford to buy real estate, the level of welfare of society, in this case, will significantly increase.

A large number of families will have a chance to spend money on education, health services, and other important aspects of life, without caring about the need to save money for housing. Therefore, the relationship between the value of real estate and the welfare of the population is logical and obvious.

Housing benefit largely provides an opportunity for a qualitatively new development of construction, which, in turn, is one of the main directions of the country’s building complex, ensuring the development of the entire social and economic system. Therefore, today, one of the basic tasks is the formation of a proper and effective strategy for the development of the housing construction system. To overcome the real estate crisis and improve the welfare of citizens, an integrated approach to the creation of living conditions is necessary on the basis of a new policy in relation to the system of housing construction.

According to Notarpietro and Siviero, the achievement of the state’s strategic goals primarily depends on the consolidated development of its regions and the fulfillment of their tasks aimed at improving the well-being of citizens (407). When assuming that each region has its own conditions and factors (socio-economic, political, natural, and other) in which it functions and develops and taking into account that the specificity of the real estate market is its local character, it is more appropriate to consider the housing benefit and the construction system at the regional level.

Interrelation of the Cost of Real Estate and Economy on the Example of New York

Since New York is one of the largest business, cultural, and administrative centers of the United States, the issue of the cost of housing here is topical. As in virtually any other metropolitan area, property prices in New York vary depending on the districts of the city, and this division is obvious and intentional. In some areas, exclusively elite constructions are built. For instance, Manhattan is one of the most expensive districts where the cost of housing is very high, and it is not easy for an ordinary citizen to purchase an apartment or a private house here (Been et al. 19). However, in other parts of the city, the cost of residential buildings sometimes does not match the incomes of people with average earnings either.

In New York, particular attention is paid to the reconstruction of old buildings, and the cost of housing in such structures also varies depending on the prestige of real estate. The city authorities control this process of renovation and monitor the funds allocated for reconstruction. As Been et al. note, “if redevelopment is banned, the value of total real estate will fall and land values will decrease” (29).

Therefore, it is in the interests of the state and the city authorities to maintain a sufficiently high level of prices in this market in order to have a stable income through the budget replenishment at the expense of buyers of elite historical buildings. Despite the fact that such constructions are often purchased not for residential but business purposes, profit is significant. Nevertheless, the housing issue is partially solved through renovation, which is also a plus. Therefore, this work has a connection with the economic growth of the region and the city in particular due to stable sales and consumers’ interest.

Relationship Between the Cost of New York Housing and Citizens’ Welfare

The income of the citizens of the United States and, in particular, New Yorkers is one of the key values that allow calculating people’s purchasing power. Nevertheless, for some stakeholders involved in real estate construction, this indicator does not play any role. According to Been et al., “builders do not internalize the impact that the amenity level of their building has on the welfare of others” (17).

It means that solely social boards and the government control the opportunities for citizens to purchase housing and pay attention to the activity of the population. In New York, where great opportunities always intersect with antisocial vices such as unemployment, homelessness, and other negative phenomena, the cost of housing is the factor that significantly affects people’s well-being. Therefore, the situation in the real estate market is the topic that affects virtually every family.

In case prices grow rapidly, the population will face serious problems. As Ansell argues, “house price appreciation has a negative effect on support for social insurance” (388). Due to the fact that most families prefer to insure their property, including real estate, this fact can cause the discontent of many citizens. A large number of New York historical buildings may be at risk if adequate protection is not given to them (Been et al. 21).

At the same time, the banking sector is unlikely to suffer since the population will continue to take out mortgage loans. As a consequence, potential problems are possible in case of a rapid rise in the price of real estate in New York, and the citizens of the city should closely monitor the situation in the market in order not to find themselves in the situation when the acquisition of even secondary housing will be extremely expensive.

Ways to Regulate the Cost of Housing

In order to control the dynamics of real estate prices and prevent the rapid falls and rises of housing prices, it is necessary to provide an appropriate financial base or a fund to support the construction business. In case developers have guaranteed demand and profit, they are unlikely to seek to sell their services at the highest possible prices. It, in turn, will positively affect people’s welfare since they will not have to spend large amounts of money and take long-term loans to pay off their credit debts.

The government of the country and regions can take measures to create an appropriate fund and at least partially finance the reconstruction of buildings. Insurance companies should interact with developers to be aware of the price policy and to help people secure their housing. Thus, the participation of different stakeholders may be an effective measure to maintain the economic situation at the local level and preserve the welfare of citizens.

Conclusion

The impact of the US housing prices on the local economy and the welfare of residents is significant, which is reflected in the rate of demand for real estate and the reaction of developers. The possibility of the improvement of certain regions and the reconstruction of historical areas is an urgent topic in modern megacities and, in particular, in New York. The housing issue depends on a number of criteria, and the cost of real estate is also regulated by specific factors so that not only the owners of the residential property could affect the pricing policy. The participation of different stakeholders is desirable in order to prevent rapid changes in housing prices and support the welfare of citizens.

Works Cited

Adelino, Manuel, et al. “House Prices, Collateral, and Self-Employment.” Journal of Financial Economics, vol. 117, no. 2, 2015, pp. 288-306.

Ansell, Ben. “The Political Economy of Ownership: Housing Markets and the Welfare State.” American Political Science Review, vol. 108, no. 2, 2014, pp. 383-402.

Been, Vicki, et al. “Preserving History or Restricting Development? The Heterogeneous Effects of Historic Districts on Local Housing Markets in New York City.” Journal of Urban Economics, vol. 92, 2016, pp. 16-30.

Loutskina, Elena, and Philip E. Strahan. “Financial Integration, Housing, and Economic Volatility.” Journal of Financial Economics, vol. 115, no. 1, 2015, pp. 25-41.

Mian, Atif, et al. “Foreclosures, House Prices, and the Real Economy.” The Journal of Finance, vol. 70, no. 6, 2015, pp. 2587-2634.

Notarpietro, Alessandro, and Stefano Siviero. “Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions.” Journal of Money, Credit and Banking, vol. 47, no. S1, 2015, pp. 383-410.

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IvyPanda. (2021, January 7). Housing Price Effects on Local Economy and Social Welfare. Retrieved from https://ivypanda.com/essays/housing-price-effects-on-local-economy-and-social-welfare/

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"Housing Price Effects on Local Economy and Social Welfare." IvyPanda, 7 Jan. 2021, ivypanda.com/essays/housing-price-effects-on-local-economy-and-social-welfare/.

1. IvyPanda. "Housing Price Effects on Local Economy and Social Welfare." January 7, 2021. https://ivypanda.com/essays/housing-price-effects-on-local-economy-and-social-welfare/.


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IvyPanda. "Housing Price Effects on Local Economy and Social Welfare." January 7, 2021. https://ivypanda.com/essays/housing-price-effects-on-local-economy-and-social-welfare/.

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IvyPanda. 2021. "Housing Price Effects on Local Economy and Social Welfare." January 7, 2021. https://ivypanda.com/essays/housing-price-effects-on-local-economy-and-social-welfare/.

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IvyPanda. (2021) 'Housing Price Effects on Local Economy and Social Welfare'. 7 January.

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