Who are the stakeholders in the big picture?Let’s face it, we are not building homes for families; we are building homes for everyone but families! Construction provides jobs for workers. Every step in the process of bringing construction materials to the builders generates employment, provides taxes for government, and profits for business owners. Realtors get a piece of the pie, too, When viewed from this perspective, more construction is good for the economy – until we have a recession!
All this ‘good for the economy’ building creates a glut of housing on the market because the product exceeds the ability of the market – local residents – to purchase the production. As soon as the market begins to slow, prices cease to increase (which is often referred to as growth, but which is really the devaluing of currency) and the economy is affected. There is less construction, thus fewer jobs in a basic industry, less purchasing power, fewer sales, more layoffs, etc. Is the solution to this problem really more construction?
What keeps the price of properties relatively stable?
In spite of repeated recesssions arising from a glut on the market, the price of house does not suffer the full impact of over production. Virtually all real estate is protected from drastic drops by finance. Developers and builders require the support of the financial community to fund projects, whether they are huge complexes and condos or single family housing. Rarely is a home built on a cash basis. It even sounds ridiculous to suggest such a thing should be considered. “Use other people’s money!” Financing is an insurance policy to protect the value of property from falling below the debt held against it.
What drives up the price of real estate?
Regardless of what is happening in the economy, real estate prices increase across time. People of influence can create a demand for housing in all kinds of ways including speculation of some new opportunity, immigration, reduction of services in small communities which drives people to the city, and the list goes on. Real estate fees, sales taxes, and legal fees all contribute to the cost of real estate but not to its value. These costs are notoriously detrimental because they reoccur every time a property is sold, and every time these costs are added to the mortgage which means years of interest is added to the total cost of the property.