Real Estate: Product Purchases and the Economy Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

The real estate market is highly sensitive to the particular macroeconomic and political changes in the countries. The reasonable forecast of the market’s development or decline is possible only in case of multiple factors consideration. It is necessary to understand that only a few aspects may be determined as solely positive or negative – overall, all of them are interrelated and may provoke negative or positive impacts on the market depending on distinct nuances.

Among the macroeconomic factors influencing the real estate market, the income dynamics, inflation, and exchange rates may be regarded the major ones. From the economic point of view, the impact on the real estate price is made by the balance between supply and demand. Wherein, the domestic macroeconomic tendencies may affect the supply and demand balance differently.

Income Rates

The average per capita income and nominal wages dynamics are a key element of demand that affects price formation significantly (Buckley, 2008, p. 2250). The income rates demonstrate the overall situation in the area of economic and business activity of population. For understanding the economy functioning, it is important to realize how the working places are created and liquidated, what percent of working force is employed, and how many people are qualified for the unemployment compensation. For the measurement of inflation, it is necessary to identify the growth of the income rates. In this way, the estimation of size and structure of population income on different levels of gross national product reproduction allows evaluation of inflation indicators that influence both demand and supply.

Inflation

Inflation, or the consumer price index dynamics, impacts the living standards as well as the nominal and real working wages ratio to a large extent (Lee, Lee, Lai, & Yang, 2011, p. 353). Inflation provokes the depreciation of savings and causes the rapid growth of prices for the consumer goods and services. It slowdowns the growth of nominal wages and provokes actual wages downfall (Aizenman & Jinjarak, 2014, p. 252).

When inflation is out of control, it induces a complex of negative impacts on the process of the economic development. It is observed that inflation narrows down the motives for the working activities because it undermines the opportunities for the realization of earnings. In the context of the substantial price growth, inflation increases the social differentiation of the population and creates a gap between the groups of income recipients (Buckley, 2008, p. 2252). Moreover, it limits the opportunity for saving. The liquid savings decrease and frequently obtain the natural form, i.e. real estate. Overall, the balance between the consumable and the saving parts of income shifts towards consumption.

Exchange Rates

Contrary to the rates of exchange, the real estate market is the inert phenomenon. The housing prices cannot significantly change in a short time. Nevertheless, the connection between the exchange rates and real estate exists.

A significant increase in the exchange rates may be regarded as the direct cause for stagnation and inflation (Liu & Mei, 1998, p. 14). In the case when the economic crisis takes place, the economic growth slowdown and the prices increase may appear simultaneously.

First of all, the drastic changes in the exchange rates may negatively affect the credit system. In times of crisis, banks often refuse to give out the credits to the various investment and construction projects because of the fear that the real estate would not be demanded. As a result, the pace of new houses’ construction may be significantly dropped. Banks also may refuse to give credits to private individuals. It is observed that during the crisis of 2008, the banks willing to give out mortgages decreased in 20 times (Aizenman & Jinjarak, 2014, p. 250). As a result, the demand for the real estate shrieked. The low demand can also be explained by the fact that most of the citizens waited for a sharp decline in the property prices and didn’t rush to make purchases. The decline in the real estate demand may give the property consumers to control and manage the situation in the market. In the low demand situation, the sellers need to make concessions and bring down the prices. The price reduction consequently leads to the revival in the market; the number of property purchases grows rapidly, and the price liquidity increases.

Real Estate Market Development

Overall, the development of the real estate market is defined by the economic growth or its expectation; the social-economic factors such as taxation and different normative acts; macroeconomic situation including income level, industrial output, employment rates, the payment balance of the state, trade balance, capital inflow, etc (Liu & Mei, 1998, p. 30).

It is possible to say that the macroeconomic conditions and financial factors affect the process of the market’s development the most. On the one hand, inflation contributes to the increase in the property investment in order to save capital. During the periods of financial crises, the trust to the stocks and bonds market goes down, and the housing bonds, on the contrary, gain popularity because they are nominated in the square meters of the future accommodation (Aizenman & Jinjarak, 2014, p. 254). On the other hand, the various financial instruments that make the property available for investments commence development. Therefore, the fiscal factors’ influence on the real estate market may be regarded as positive.

The main social factor affecting the market development is the population solvency that is formed under the influence of the income level and the property prices. The decrease in the price and income ratio due to population income growth is regarded as a positive tendency in the market development because it makes the property more available.

Equilibrium Quantity and Price

The formation of the market price largely depends on the economic factor – the increase in the standard of living and accumulation of savings leads to the growth spurt in demand for the product because real estate is traditionally considered the most reliable and conservative method of the economy (Hepsen & Vatansever, 2012, p. 73). The development of bank crediting lowers the bar on solvency for the real estate buyers. In case the supply is limited, it creates a strong pressure on the price formation from the side of consumers.

The property price depends on multiple economic factors. Macroeconomic factors are inflation, employment and income rates, exchange rates dynamics, economic activities development, real estate demand, etc. (Hepsen & Vatansever, 2012, p. 73). Overall, the economic situation is regarded as an objective factor affective price development. The subjective factors include the expectations for the economic change, personal preferences, property condition, etc.

The population income rate indication is linked merely to the product demand while inflation and exchange rate dynamics are associated with both supply and demand. In the case of real estate market, the level of demand may be regarded as a decisive factor in the price formation. All three of the analyzed factors are demand-related; therefore, they will be proportionally related to price formation.

References

Aizenman, J. & Jinjarak, Y. (2014). Real estate valuation, current account and credit growth patterns, before and after the 2008–9 crisis. Journal of International Money and Finance, 48, 249-270.

Buckley, T. (2008). Real Estate Regulations in Accra: Some Macroeconomic Consequences? Urban Studies, 45(11), 2249-2271.

Hepsen, A., & Vatansever, M. (2012). Relationship between residential property price index and macroeconomic indicators in Dubai housing market. International Journal of Strategic Property Management, 16(1), 71-84. Web.

Lee, M., Lee, M., Lai, F., & Yang, T. (2011). International articles: Do real estate stocks hedge inflation in the long run? Evidence from three East Asian emerging markets. Journal of Real Estate Literature, 19(2), 347-372. Web.

Liu, C. H., & Mei, J. (1998). The predictability of international real estate markets, exchange rate risks and diversification consequences. Real Estate Economics, 26(1), 3-39. Web.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2020, May 14). Real Estate: Product Purchases and the Economy. https://ivypanda.com/essays/real-estate-product-purchases-and-the-economy/

Work Cited

"Real Estate: Product Purchases and the Economy." IvyPanda, 14 May 2020, ivypanda.com/essays/real-estate-product-purchases-and-the-economy/.

References

IvyPanda. (2020) 'Real Estate: Product Purchases and the Economy'. 14 May.

References

IvyPanda. 2020. "Real Estate: Product Purchases and the Economy." May 14, 2020. https://ivypanda.com/essays/real-estate-product-purchases-and-the-economy/.

1. IvyPanda. "Real Estate: Product Purchases and the Economy." May 14, 2020. https://ivypanda.com/essays/real-estate-product-purchases-and-the-economy/.


Bibliography


IvyPanda. "Real Estate: Product Purchases and the Economy." May 14, 2020. https://ivypanda.com/essays/real-estate-product-purchases-and-the-economy/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
1 / 1