Real Estate sector and economic sector is facing a grim situation these days due to Corona Pandemic. It started from Wuhan China and now almost 199 countries and territories of the world have been affected by this epidemic. The pandemic is causing huge shock to the world economy.
This is reflected by the dip in currency and stock values throughout the globe. The world is now facing a pandemic of a gigantic nature. There is a need to assess effect on real estate sector due to economic crises looming dark clouds over it. In the following, the current economic crises will be studied wrt the past instances and suggest future for real estate
Economic Crises- Global Impact
The corona virus pandemic is spreading fast. The World Health Organization declared the virus outbreak a Global Public Health Emergency. However, due to the developing nature of the pandemic, it can be said that the real damage cannot be estimated as yet.
The impact of this pandemic is already having a profound and serious impact on the global economy. In order to assess the possible impact on the economy, it is important not only to focus on the epidemiological profile of the virus but also on the ways that consumers, businesses, and governments may respond to it. This pandemic will most directly shape economic losses through supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. And it
will do so both in traditional, textbook supply-and-demand ways and through the introduction of potentially large levels of uncertainty.
Economic Crises- National Impact
Our country, Pakistan is effectively locked down, with all the cities brought to a standstill. All the shopping centers, hotels, restaurants, transport even the flights have been shut down. All the factories, workshops etc have been closed. The people have been asked to remain safe at home and even the religious centers including masajids have been ordered to remain closed for worshipers. It can be said that life has been
brought on the hold.
Pakistan is an economically very weak country. The public debt of Pakistan is estimated to be about ₨ 35.094 trillion which is 91.2 percent of GDP. It is burdened with more than $111 billion in foreign debt. It must be remembered that about 35% of National population lives below poverty line (less than 2 $ /day). It is estimated that economy of Pakistan will suffer massively. So the valid question should be that how will the real estate sector effect due to the economic crises?
Economic Crises- Historical Perspective
During the great depression, after 1929 the American gross domestic product declined for four straight years, but then slowly and haltingly climbed back by 1936. Between 1929 and 1939, the American unemployment rate averaged 13.3 percent (calculated from “Corrected BLS” figures in Darby, 1976). Department of the Treasury, generated general income tax and extended to virtually all Americans. The number of Americans
required to pay federal taxes rose from 4 million in 1939 to 43 million in 1945.
Resultantly, federal tax revenue grew from about 8 percent of GDP to more than 20 percent. (“Fact Sheet: Taxes”). By the end of World War-II, 1945, USA became the world power, economically and militarily. The similar trend can be observed about most developed economies of Europe who were devastated by the war.
The world witnessed a real estate crisis between 2007 and 2010, that contributed to Recession. It was triggered by a large decline in home prices after the collapse of a housing bubble. The housing bubble caused several major financial institutions collapse, with disruption in the flow of credit to businesses and consumers. Therefore, it can be said that real estate sector crises harbours economic crises.
A cursory look at the last hundred years of economic boom and bust cycles, reveals that the real estate was involved in many of them. The real estate industry makes up a large percentage of household wealth. It is the most valuable asset for farmers and ordinary land owners. It is a major factor in retail and construction, and it plays a significant role in many other industries as well. This is because real estate sector is pervasive.
How Real Estate Affects Economy
The pandemic may hurt any industry, but the real estate, because the value of the land never depreciates significantly due to halt of industrial or trading setup. The home / landare wealth, which gives confidence to economic behavior of the land owner. Consumers feel more confident when prices / wealth is increasing, which pushes them to expand more. It has been seen that people spend more and save less during an upswing in home values. Consumer spending surge can have strong positive effect on the national economy. The rise and fall of real estate prices creates ripple across the economy.
Real estate also can affect household cash flow. Real estate market creates jobs for agents and brokers directly and millions of people in spin off jobs. These include construction, decoration, landscaping, moving services, etc. It also have positive effects on furniture, interior design, pool installation and similar businesses. The bottom line is that real estate is strongly linked to family and business wealth. Changes in home values certainly will be felt in the nation’s wallets and pocketbooks.
It is also noteworthy that economic slowdown bites the real estate sector hard. The liquidity crunch squeezes buying. It has been found that increasing real estate cost decreases purchasing houses and lands. It then results up trends in rents. In an economic slowdown, property owners do not construct houses on plots they have bought.
Real Estate / Housing Sector- Growth Engine of Economy
Real estate / housing sector has a direct link with the commercial growth of the cities.
Pakistan’s population is about 220 Million and about one third of the same is homeless. The large portion of this segment of population is living in Urban Areas- the Cities.
In Pakistan more than 5 billion dollars / year are spent in housing / construction sector. Moreover, many more billions are spent on buying residential and commercial plots. Construction output accounts for 2% of GDP as per the data of Pakistan Bureau of
Statistics. The housing sector is approximately 1% of GDP. It is a said that 40 sectors of
small and large manufacturing industry involve in the housing / construction sector The large portion of the country is also youth having tremendous potential to rise from the current state of slumber. This youth bulge has demand for comfortable housing. The
STAR Jaidad Ujala Homes initiative (https://www.youtube.com/watch?v=-M_8NvGeGPc) has seen a tremendous response with tens of thousands of applicants. https://starjaidad.com/ujala_homes. Hence, there is a demand for housing sector to grow.
STAR Jaidad Recommendations Government of Pakistan has a great desire to support the Real Estate / Construction Industry for economic uplift of the country’s economy. The federal government is likely
to announce a package in coming weeks for the well being and kick start of the housing sector. There are many worthwhile Projects that are being marketed by various firm from reliable builders and town planners. The prices are low and it’s buying time without any doubt. Bloom Berg has reported that IMF considers growth engines among the top 20 countries in five years will include Pakistan, Turkey, Mexico, and Saudi Arabia. https://www.bloomberg.com/news/articles/2019-10-19/which-20-countries-will-dominate-global-growth-in-2024
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