The Effect of Real Estate on Today’s Economy

August 25, 2015 - Updated: September 1, 2015

The Effect of Real Estate on Today’s Economy

By Jennifer Choy

Many experts agree that the recent U.S. financial crisis was the impetus for the global Great Recession. Subsequently, the financial troubles in the U.S. were brought upon by overvalued and complex subprime mortgages and the consequent bursting of the housing bubble. It is evident that the real estate market can have a significant impact on the economy. In fact, the real estate sector makes up around 12.3% of Canada’s GDP, with each dollar spent on housing resulting in a GDP increase of approximately $1.40. The housing market can create rippling effects in other industries and is an important contributor to Canada’s economy.

Typically, a house represents the single largest investment made in an average Canadian’s lifetime and makes up a considerable percentage of their total assets. Although variances in real estate values do not directly affect net wealth, it can have an impact on a household’s access to credit. Property value can be used as collateral to increase borrowing capacity and which in turn, boosts household spending. As individuals begin spending more money, businesses will prosper, leading to the potential creation of additional job opportunities. The economy will benefit from employed individuals investing into their communities and successful companies creating opportunities for those within their communities.

As a macroeconomic component, the housing market has the potential to affect different financial indicators in Canada. With its direct effect on inflation and financial stability, financial services such as banks and credit unions are clearly impacted by changes to the real estate sector. In an abundant economy with strong consumer confidence, individuals are more likely to purchase new homes and the value of housing starts will rise. Housing starts is a figure that reflects the demand for newly built homes and is a key indicator that many experts use to determine economic wellbeing. Individuals will usually apply for loans or mortgages with financial service providers to aid their purchase of a new home. As previously mentioned, homes can also be used as collateral to increase access to credit, resulting in further borrowing. Banks and other financial institutions will benefit from these activities as they have the opportunity to increase their revenues through interest payments from debtors. The success of financial services influences the economy in a multitude of ways. Banks pay dividends worth billions of dollars to pension funds and RRSPs annually. At retirement, Canadians will receive income from these plans and be able to maintain their living standards. Consumption rates will remain constant as retirees are able to continue to purchase goods and services with their entitled benefits. Furthermore, financial institutions are responsible for the creation and management of many employment positions, contributing notably to the Canadian labour market. Lastly, these companies are typically engaged and involved in their community and are recognized corporate donors in supporting a variety of community programs in education, healthcare, the environment and more. The real estate market undoubtedly is of significance to the economy through financial services.

Direct jobs that are created from a growing housing market include construction and contracting for renovations. Upon acquisition of a residential or commercial unit, the tenant or owner will also be required to pay for a variety of services to maintain their property. The success of companies who provide these ancillary services such as utilities, hydro, insurance and telecommunications are also correlated to the real estate market. The housing sector can impact employment rates by creating full-time jobs, as well as jobs in indirect and ancillary industries. Employed individuals will experience a surge in personal disposable income which leads to consumer spending. This results in a cyclical effect as goods and services are purchased and more investments are made. Additionally, taxes will be paid to the government and reinvested into transportation, health, education and other public services. Ultimately, standards of living will improve as the economy expands and becomes stronger.

In summary, all industries that play a role in the Canadian economy are intricately linked and changes to one sector can result in immediate repercussions to another. It is clear that the real estate market is of significant importance to the economic well-being of the Canadian society.

 

 


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