Macro-Economic Factors. How Do They Influence the Real Estate Market?

Just like other sectors of the economy, the real estate industry is also influenced by various macro-economic factors that affect its performance and prospects. Here are 3 macro-economic factors that have impact on the real estate market.

Inflation and Interest Rates

The general increase in the prices of goods and services over time reduces the purchasing power of consumers and erodes the value of money. With regards to real estate, property values also tend to rise in response to inflation, making real estate an attractive investment to hedge against rising prices. However, excessive inflation can lead to speculation and artificial price bubbles, creating an imbalance within the real estate market.

Furthermore, high inflation also leads to high interest rates (cost of borrowing money). This discourages borrowing to fund capital-intensive projects and investments such as real estate. Conversely, lower interest rates encourage borrowing, boosting accessibility to favorable mortgage rates and indirectly impacting property sales and investments.

Exchange Rate

The exchange rate affects the cost of imported construction material and machinery. A depreciation of the local currency makes imports more expensive and reduces the profitability of real estate developments, with the reverse also being true. Additionally, a stable exchange rate enhances consumer confidence, as industry players can anticipate costs and revenue more accurately, leading to consistent and rational property pricing.

GDP Growth

A third macro-economic factor that affects the Real Estate Industry is economic growth. As the economy flourishes, rising incomes generate a surge in demand for both residential and commercial properties. In a growing economy, businesses thrive and expand, leading to a demand for office spaces and other commercial properties. Simultaneously, as incomes rise, more individuals aspire to own homes, pushing the residential property market to new heights. A robust economy underpins consumer confidence, which is instrumental in property investment decisions.

On the contrary, economic downturns can lead to reduced consumer confidence, tighter budgets, and decreased demand for real estate.