The Impact of the Housing Sector on the Economy
The housing sector is a vital component of an economy. Trends in the sector are likely to be replicated on an economy-wide scale leading to far-reaching effects as the 2008 global financial crisis demonstrated (Haberler, 2017). Housing contributes to the economy in two primary ways, residential investment and consumption of housing services. Residential investment involves the construction of housing structures, remodeling, and broker's fees. Housing spending involves payments of rent and utilities. Given the impact that the housing industry has on the economy, growth trends in the sector have a bearing on the Trend the GDP takes.
The Relationship Between the Housing Sector and the Economy
The GDP is a macroeconomic indicator that measures the value of products produced within a country during a certain period. Given that the housing sector is a subset of the economy, one would expect an expanding economy to have a corresponding expanding housing sector and vice versa. The real estate industry is the greatest source of wealth and savings for many families (Haberler, 2017). A healthy real estate industry creates jobs and value for other sectors of the economy such as manufacturing, retail, and offices. The industry is also labor intensive. As such, a slowdown in the sector contributes immensely to high unemployment rates. Furthermore, there are other linkages that spread waves in the housing sector to the rest of the economy. A decline in real estate prices lowers the value of savings and investments in housing property while reducing the number of home equity loans available to homeowners. The latter is likely to lead to reduced consumer spending leading to a contraction of the economy.
The Potential Housing Bubble and Economic Adversity
The housing bubble of 2006 created the stage for a global economic recession from whose shadow the world is still trying to emerge. At the moment, there are fears that a similar bubble in the housing market may be expanding. One of the corrective measures of the financial crisis by central banks was to lower interest rates to near zero. This, while attempting to solve a problem may be creating another one in a similar manner (Hirano & Yanagawa, 2016). Low-interest rates are a precursor to asset bubbles. Investors can borrow easily with low-interest rates. They, therefore, attempt to find an asset to invest in that promises returns higher than those of bonds. Investors are likely to cause an increase in the value of an asset faster than its real value.
The Challenges and Importance of Avoiding a Housing Bubble
At the moment, the US GDP is increasing at a modest rate. This has prompted the Federal Reserve to raise the Fed rate slightly with the prospect of raising it further in the future. Since the housing bubble burst, there have been bubbles in other assets such as oil, gold, the stock market, treasury notes, US dollar, and Bitcoin. All these bubbles are often followed by a burst that takes the asset value back to equilibrium. However, the housing bubble is likely to cause greater economic adversity as the past has taught.
Individual Actions and Government Intervention in Preventing Housing Bubbles
While government intervention may attempt to correct the effects of a bubble, individual action by investors in markets is a better way of avoiding the problem. Shocks in the economy can be avoided by attempting to act rationally in the face of a suddenly popular asset class that is likely to lead to demand-pull inflation. Furthermore, sellers of housing property have too high expectations that may not be met by the market due to a low rate of increase in disposable income.
References
Hirano, T., " Yanagawa, N. (2016). Asset bubbles, endogenous growth, and financial frictions. The Review of Economic Studies, 84(1), 406-443.
Haberler, G. (2017). Prosperity and depression: A theoretical analysis of cyclical movements. Routledge.
