5 Macroeconomic Indicators That Matter To Real Estate Investors
Macroeconomic factors deeply influence real estate prices. This is especially true of the price of new residential developments because they are often a fraction of the homes in the economy. When interest rates fall or when the economy is strong, people are far more likely to buy homes, and this significantly raises demand for newly built homes. The opposite is true when interest rates and unemployment rise. However, the residential property market is one of the most complex sectors of the economy and this makes interpreting macroeconomic indicators a tough job. It is often difficult to explain why property prices are falling, rising or stagnant.
Let's look at five macroeconomic indicators real estate investors must watch while making investment decisions:
Gross Domestic Product (GDP)
GDP is the cumulative monetary value of goods and services produced in a nation in a specific time period. GDP growth figures are one of the most reliable measures of health of a nation's economy. When these figures show growth, it's an indication companies are expanding their operations, hiring more employees and producing better. When the growth numbers fall, it is likely that companies are contracting, laying off employees and producing less. This may also trigger a fall in real estate market investments. Housing markets and GDP growth figures are intimately related to each other. In advanced market economies, a rise in home prices is often a precursor to a rise in the GDP numbers. When investment in the real estate sector falls, it may lower GDP growth, because the contribution of construction industry to GDP is significant.
Interest rates
The Reserve Bank of India's monetary policy can raise or lower investment in the sector substantially. This is also a reason why residential property markets are subject to huge fluctuations. When the central bank cuts the repo rate, banks may lower home loan interest rates. This will make borrowing cheaper. However, when interest rates fall, demand for homes may rise, raising prices in the long run. Assume that newly built units are merely one per cent of the homes in the country. Even if a rise in interest rates of one per cent lowers consumption of residential real estate by .1 per cent, this may lower sales of newly built units by 10 per cent.
Unemployment rate
Unemployment rate is one of the major factors that influence residential property markets. In a healthy economy, unemployment rate is likely to be in the range of three to five per cent. When unemployment rate is high, people are less likely to buy homes because they may have to default on loan payments. Moreover, when unemployment rates are high, the government may borrow more, leading to a high fiscal deficit.
Inflation
Inflation is another major macroeconomic factor that real estate investors should watch. When inflation is high, this means that prices of good, including that of homes, are rising. This would lead to low investment because businessmen would find it more difficult to estimate long-run profits in an economy in which prices are widely fluctuating. Consequently, investments in residential real estate and rental stock are likely to fall. Rising inflation numbers would also pressure the central bank to raise interest rates. Moreover, when inflation is high, real yield from real estate investment would be lower.
Currency exchange ratios
The Rupee-Dollar exchange rate greatly influences investment in real estate in India. When the Rupee-Dollar exchange rate falls, the price of Indian real estate falls relative to the US Dollar. This means that real estate in India becomes cheaper to foreign investors. This may raise foreign investment in real estate in India. The reverse is true when the Rupee-Dollar exchange rate rises.
All things said, it is important to remember that fluctuations in these macroeconomic indicators are indicative and do not say anything definite about the performance of real estate markets or that of the economy.