Executive Summary
Macro-economic factors are factors that affect the wider financial systems such as national, regional, or international economies. These factors span across the whole economy.
They affect all industries or many markets. Some of the macroeconomic factors that have an effect on the main industries and economies include unemployment rate, inflation, the Gross Development Product, and interest rates. The property market in any economy constitutes one of the most important means of livelihood for many households. The housing or real estate industry in particular is important, with households spending a significant amount of their income to pay for the services provided.
One of the most important developments that led to this paper’s focus on property markets is the sub-prime crisis in the USA that led to the global economic crisis (Vargas-Silva 2007, p. 998). Many economies around the world were affected, thus leading to the stringent measures put in place to control the macroeconomic factors that influence property markets. Some of the factors discussed in this paper include unemployment that has a negative impact on the property market.
A rise in inflation causes a negative performance on property markets, similar to the situation that occurs after a rise in interest rates. On the other hand, the increase in GDP for a country is found to have a positive effect on property markets in the long-term for nations. These factors are tightly controlled by administrations in different countries and regions. They have the ability of changing the performance of any economy. The essay therefore discusses these factors and their effects on property markets.
Unemployment
Macroeconomic factors are not specific to any individual market. They include unemployment rates, the Gross Development Product (GDP), and price indices such as inflation among others. These factors have critical effects on the property markets. The performance of this sector is dependent on them much more than most other industries and markets.
The property market mainly constitutes the housing market where the housing services are provided based on the factors of demand and supply (Zuh 2003). The goods and services markets are very subjective to elasticity in most instances. The property market is one that is inelastic especially in the housing supply (Vargas-Silva 2007, p. 998). Housing and the property markets are some of the major spending sources for many families.
The changes in prices for this market are likely to have a major effect on families and in turn the national and regional economies. These changes in prices of property markets are therefore a major concern for individuals, governments, and other institutions. The supply in the property markets is not adjustable in the short run. Whenever there is an increase in expectations of capital gains from investments in this market, the result is an increased demand and high volatility in the prices.
An example of the volatility in the property markets is the 2007 crisis in the United States. This predicament started initially as a boom in the mortgage markets in the country (Vargas-Silva 2007, p. 998). The resultant crisis in the mortgage market led to the institution of several measures to contain it, with those involved expressing hope that it was just a simple and small incident.
Despite the efforts, the same year saw the widespread housing market downturn in the United States, which later developed into an international crisis (Agnello & Schuknecht 2011). Since the onset of this crisis, governments all over the world have put more measures to prevent a repeat of the same. The data on prices in the property markets is one of the most monitored data by the central banks.
Macroeconomic factors such as unemployment and inflation are also a significant influence on property markets. In the past number of years, there has been an attempt by governments all over the world to control these macroeconomic factors to manage the prices of property markets. The housing sector is one of the markets that have become controlled in an attempt to influence the macroeconomic factors and their effects on the economy. These controls are in the form of monetary and fiscal policies.
The unemployment rate in any nation or region is a major factor affecting property markets. When the number of people unemployed is high, fewer people provide the markets for the property market. Less capital is available for investment in this area. Regions with the highest unemployment tend to have poor performance in the property market. When unemployment is high, a large number of people may not be able to buy the property.
This means that investors in the industry can only provide enough housing and property for those that are able to afford. This effect is cyclical, thus leading to more unemployment since builders are laid off since there is less property trading. High unemployment also acts in demand and supply chain, thus driving down demand and consequently the prices of properties in the unemployment areas.
Another effect of unemployment on the property markets is foreclosure. Unemployment means that more people are unable to pay their mortgages. More and more properties come on sale to avoid the foreclosures. With more property for sale being present in the market, prices in the property markets also drop, thus contributing further to the poor performance of this industry.
With high unemployment, job security becomes an issue, with the prospective market clients losing faith and trust in mortgages in the fear that they would not be able to pay them in the future due to the likelihood of being unemployed too (Gervais 2002). The risk-taking aspect of mortgages reduces, with less people getting involved in the purchase of the properties, thus leading to price changes.
High employment, on the other hand, has the effect of driving prices up in the property markets. More people can afford housing and other properties. The high demand influences the supply chain in a positive manner, thus leading to the increase in prices. More builders are also required since more units of property increase in demand. This situation too drives down the unemployment, thus leading to a cyclic effect already suggested. The increased ability to buy property also results in more people also investing in mortgages.
Inflation
Inflation is another significant factor affecting the property market. It is a subject of government and central bank control to ensure that the market stays productive.
Inflation is the level with which prices increase in general in a particular economy. The Consumer Price Index (CPI) has been a reliable indicator of the price increment. When a calculation of the actual inflation is desired, the CPI is created using a group of consumer goods that have been awarded different weights for the average household in the nation or region (Jud & Winkler 2002).
Inflation has a major effect on property markets. It has had this effect in a number of nations. The defining factor on this effect is the unpredictability of the value. The effects depend on whether inflation was unexpected or expected.
If inflation is expected in a particular market such as the property market, the market players have ways of preparing for the expected outcomes, which mainly involve putting in place appropriate measures to prevent possible losses. If inflation hits the market unexpectedly, the mortgage owners can be at an advantage since their property loses value. They, therefore, have a relatively cheaper loan to pay (Follain 1981).
There are other suggested effects of inflation on property markets, including the fact that increased inflation reduces people’s incentive to invest more in the property market, thus lowering demand in the market (Feldstein 1992, p. 254).
Increased inflation also lowers the demand for housing and any other property based on the resultant increase in the nominal housing payments (Kearl 1979, p. 3). Positive performance of the economy and lower inflation rates are known to result in lower demand for properties and housing. The result is increased prices for the industry.
Greece joined the European Monetary Union, with the result of this venture being the added performance of the property markets. Some of the factors that led to the positive performance of the property markets in Greece include the low inflation rate because of competition in the banking industry and the policy by the EMU to have high capital mobility (Cocco 2005, p. 356).
The country also attracted more investors in the property markets because of the reduced inflation and the better performance of the economy after the integration into the EMU.
Gross Development Product (GDP)
The Gross Development Product (GDP) of a country can be described as the product of adding the economic value in a specific country done by organisations. This national value is generated from the subtraction of the sale price from the production cost by the various key national market actors, with the result of this being the total value added in the process (Cocco 2005, p. 356).
It is important while calculating the GDP of a particular country to analyse the demographic characteristics present in population since this information provides an indicator of the likely future performance. Some of these important demographic factors in the population include the ages and their distribution in the workforce. A combination of the demographic factors and the economic structures provide a reliable indicator of the future GDP.
The GDP of a particular country is an important determinant of prices and performance of the property markets in this nation. A better GDP means that the economy is performing better. This translates to the better performance of the property markets as well as other markets in the country. There are many examples in the world where the GDP has been an influence for the property markets. The developed nations often have better-performing markets because of their better GDP.
An example of how the GDP affects property market performance is France, after the global economic crisis. As discussed above, the global economic crisis originated in the US. It was referred to as the US sub-prime crisis (Vargas-Silva 2007, p. 998). Because of the crisis, the GDP of France grew negatively, “from the second quarter of 2008 to the first quarter of 2009, that is four consecutive quarters of negative growth” (Ferrara & Vigna 2009, p. 2).
The same period saw a drop in the building permits given by authorities by about 18.7% compared to the same period a year before (Ferrara & Vigna 2009, p. 2). The country saw a drop in demand in property markets, with this situation being attributable to the poor performance in terms of the GDP. This serves as a proof that the GDP is an important determinant of performance in the property markets.
Interest Rates
Another key determinant of the performance of the property markets is the interest rates that exist within a particular nation or economy. The interest rate can be defined as the price incurred when a party is borrowing money. Interest rates are applied in the finance industry. The participation of borrowers and lenders in equilibrium leads to the determination of the rate. When inflation is high, value of money reduces. Consequently, borrowers in the system demand more interest for compensation in the value lost in the process.
The property markets are influenced by the interest rates since high interest rates lead to reduced investment in housing investment as compared to the fixed income assets (Cocco 2005, p. 536). A short-term increase in the interest rate, however, has the effect of lowering demand in the property markets, while increasing the prices of materials used in the industry. The result of this situation is the poor performance of the market.
Conclusion
In conclusion, several macro-economic factors affect the performance of property markets in any industry. Some of the factors that are discussed include the unemployment rate, inflation in any economy, the Gross Development Product, and interest rates. These factors have an observed effect mainly on prices in the property industry.
References
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