|Posted on 13 April, 2018 at 6:50|
IMPACT OF REAL ESTATE SECTOR TO THE ECONOMIC GROWTH OF A NATION. Real estate is one of the most important sectors of any economy. The affordability of real estates, rental prices and changes in those prices has a direct impact on the wealth of property owners and tenants and their consumer spending. So, What then is real estate? There are various definitions both from within and outside the real estate industry, but in this article, it’s important to view real estate in the business context. According to the business dictionary, Real Estate can be defined as; ‘’Land and anything fixed, immovable, or permanently attached to it such as appurtenances, buildings, fences, fixtures, improvements, roads, shrubs, and trees (but not growing crops), sewers, structures, utility systems, and walls. Title to real estate normally includes title to air rights, mineral rights, and surface rights, which can be bought, leased, sold, or transferred together or separately. Also called real property or realty.’’---- Business Dictionary. Types of Real Estate Residential Real Estate; The most common category here is single-family homes. There are also condominiums, co-ops, townhouses, duplexes, triple-deckers, quadplexes, high-value homes and vacation homes. Commercial Real Estate; They includes shopping centers and strip malls, medical and educational buildings, hotels and offices. Apartment buildings are often considered commercial, even though they are used for residences. That's because they are owned to produce income. Industrial Real Estate; Includes the manufacturing buildings as well as warehouses. The buildings can be used for so many institutionalized purposes, either research storages or so on. Some buildings that distribute goods are considered commercial real estate. The classification is important because the zoning, construction,, and sales are handled differently. Land; Includes vacant land, working farms,, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly. HOW REAL ESTATE IMPACT THE ECONOMY The contributions of real estate sector to any country’s economy cannot4 be overemphasized; it’s a sector whose impact has been felt tremendously in economies of both developed and developing nations. Let’s take the a 44short look at some key real estate segments and it’s contributions to the economy from a global perspective. EMPLOYMENT; Construction is an important sector that contributes greatly to the economic growth of a nation. The Construction Industry is an investment-led sector where government shows high interest. Government contracts with Construction Industry to develop infrastructure related to health, transport as well as education sector. For the prosperity of any nation, Construction Industry is quintessential. Furthermore, during real estate boom (A period whereby demand for housing is more than supply), construction alone can produce thousands of jobs both for skilled and unskilled graduates. Ranging from architects to site engineers to surveyors, town planners, project managers, artisans and laborers all can be engaged in the construction of residential, commercial or industrial properties. Which will, in turn, add to the GDP of such economy. INFRASTRUCTURE; According to Francis Chinjekure ‘’Globally, real estate sector is one of the most profitable ventures of several economies and one of the indices of measuring economic growth of a society. It is a sector that mirrors the economic viability and sustainability of an economy and its poverty level. In generality, the level of infrastructure development in a country says a lot about its economic status. Unfortunately, the role of real estate in economic growth is overlooked in developing economies like Africa and thus its potential is often missed’’. GROSS DOMESTIC PRODUCT (GDP); A looks at how the housing market and changes in house prices affect the rest of the economy. In summary: Rising house prices generally encourage consumer spending and lead to higher economic growth, while a sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic growth. Additionally, A rise in house prices creates an increase in wealth for householders. As a consequence of this increase in house prices, householders will generally: Be more confident about spending and borrowing on credit cards. They can always sell their house in an emergency. A rise in house prices enables homeowners to take out a bigger mortgage. Banks can lend more on the basis of the increased price of the house. Households could use this bigger loan to spend on other items. This can create a significant increase in consumer spending. For example in the UK, in 2006, with rising house prices, equity withdrawal added an extra £14bn to consumer spending. However in 2008, with falling house prices, equity withdrawal was -£7bn. (people taking opportunity to pay off mortgage). In a simple approach, this analysis means that when there is a fall in house prices, there tends to be a negative wealth effect and a negative impact on economic growth. Because households see a fall in house prices, their main form of wealth declines, this reduces their confidence to spend. They are more likely to devote a higher % of their income to try to pay off their mortgage early. Also, falling house prices cause more people to be trapped in negative equity (a situation where your house is worth less than outstanding mortgage). This causes a fall in spending and precludes any opportunity for equity withdrawal. PROPERTY CYCLE AND THE ECONOMIC GROWTH; The booms and busts of real estate prices echo those of the real business cycle. Generally, The average duration of housing appreciations and depreciation in a typical housing cycle is approximately six and five years, respectively (Bracke 2013). So the housing market would appreciate by 5.4% per year (the sample mean in appreciations) for the first six years and then depreciate by 3.2% per year (sample mean in depreciation) in the five years that follow. Both will have the impact on the economy. Therefore, in conclusion, Real Estate is an important part of the economy and is accountable for an extensive part of its development, advancement of any nation’s infrastructure stand & major originators of trade and industry activity. In general, it’s a fact that, more money has been made in real estate sector alone than all other financial investment streams combined globally and evidence of this are shown in most world top billionaires, people like Donald Bren with a net worth of $15.1 billion, President Donald Trump with a net worth of $4.5 billion. Rick Caruso, David Lichtenstein, and other world billionaires were listed on Forbes magazine to have made their fortune in Real Estate. This could be because the real estate sector has strong connections with various industries such as tiles, paints, fittings & fixtures, cement & steel to mention a few, so prosperity in this sector means wealth for all other sectors, thereby positively impacting such country’s economic growth. Although, like every other investment, real estate might experience ups and down at certain time, but in general like the former US president said; ““Every person who invests in the well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” -- Theodore Roosevelt, U.S president. ‘’Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” -- Franklin D. Roosevelt, U.S. president. Prepared by; AKINWUNMI AWOYODE. MSc (Real Estate Management and Investment.UK), CIPM (UK). International Member of National Association of Realtors. NAR. Principal Partner; PROPERTY MAX RESULTS LTD.