Down Fall of Real Estate, Research Paper Example

Down fall of Real Estate and What Implications This Has on the Economy

Abstract

This paper will take into account real estate investment and the trends in concerned industry. The article will highlight on issues affecting that value of real estate such as, site characteristics and use, property, demand and supply. Moreover common causes of problems associated to current real estate development will be evaluated. Finally, there will be suggestions on possible solutions. The objective of this review will include study of factors affecting the value of real estate, examine current factors of real estate boom and examine future constraints/ limitations of real estate investment (Diamond, 2005, 187).

Introduction

Real estate refers to immovable property such as land or any other thing that is permanently affixed to the land (fixtures) e.g. buildings. Real estate also refers to type of ownership interest in real estate e.g.;

1. Lease hold: refers to right to use and possess real estate according to terms of use.
2. Reversion: Refers to the right to possess the free interest in real estate after the expiration of a life estate, leasehold or estate for years.

Estate for years: Shares some similarity with but its term is for a specific number of years.

1. Life estate: This is an interest in real estate that is granted to a life tenant until he dies. When the life tenant dies, then the interest is terminated.
2. Freehold: This provides the owner the right to use the real estate for any purpose that is lawful and sell when and to whom the owner pleases.
3. Co-tenancy or concurrent: this is where a property is owned by more than one person.

The business of real estate includes things such as:

1. Brokerage that involves assisting buyers and sellers to transact.
2. Appraisal, which is the professional valuation of properties

• Development which is the improving of land for use by replacing or adding land and buildings.

1. Relocation services that is moving of people or business to hardship areas or countries
2. Property management that is managing a property for its owners and
3. Real estate marketing that revolves around managing the selling side of the property business.

Real estate is divided into three categories; commercial, residential and agricultural. When a person invests in all or any of the areas he can make profits through appreciation of capital, rent, agricultural produce, commercial use, lease and income. The cost and price of real estate can be affected by the following factors: physical characteristics of the property, property rights, time horizon of holding the property, geographical area and rate of development.

The downfall of the real estate sector has been due to a number of reasons. There are some laws that could be put down by the government restricting allocation of enough land for commercial development. The land might also not have a clear title making the ownership as well to be unclear thus causing a scarcity of land. Poor record keeping can contribute to this problem and also, if complaint processes are not well handled. A solution to this problem would be to up date and computerize all records to clarify land ownership. Also, all legal land disputes should be solved with a limited time period possible by creating a special fast track courts.

High registration and cost of stamp duties hinders development of real estate industry. This is accompanied by rampant corruption. The solution to this is to simplify registration procedure by making it more transparent. Also, a large part of the urban properties are kept off the market by rental laws that are obsolete and outdated. To protect the property and its owner, the rental laws ought to be revised. Tax laws also ought to be revised to make the renting of properties an attractive investment option (Diamond, 2005, 187).

The high rate of inflation has caused the slow growth of the real estate economy which in turn has affected employment. The share market experiencing depression increases the inter bank rates which in turn increases interest rates which reduces the buying power. The low rate of GDP and inflation has been the major causes of down fall of the real estate industry.

Increasing rate of inflation has caused instability in the real estate market. The down fall of real estate industry affects the GDP negatively leading to increased unemployment and low income per household. Other barriers to GDP can include product market, land market, privatization and lack of infrastructure.

Findings

A decrease in GDP also decreases the prices of real estate because of high degree of positive correlation between the GDP and real estate prices (Diamond, 2005, 187). This is also the case with per capita income, i.e. Real estate prices decreases with decrease in per capita income. The interest rates also affect real estate prices because it affects borrowing and lending by investors.

A downfall in real estate value can have severe consequences on the economy as because in most cases housing sector forms a large percentage of real estate in terms of value followed closely by commercial sector. The real estate sectors downfall is due to hike in mortgage and high inflation.

Recommendations

The government should take measures to protect the low income earner who are not able to buy houses due to high prices (Diamond, 2005, 187). The government should take steps to strike a balance in the supply of agriculture land and commercial land given the increasing population. Airports and ports need to be privatized to increase competition and improve service delivery. The government should involve itself more in record keeping and property management to enable proper valuation and estimation of real estate.

Conclusion

The real estate is greatly affected by macro-economic factors such as per capita income, interest rates, employment and GDP. Real estate is mostly affected by location which determines returns and the value of the real estate. Any country would need a viable capital market base for property financing. Real estate can be given a boost mostly by private investors. New project interests are owned by institutional investors. This should not discourage the middle class from investing in real estate as the can invest for medium term in new instruments (leases etc) other than investing directly into property. Investment in real estate industry has always been lucrative but care should be taken while evaluating investment opportunities in this area due to increasing interest rates and rising global inflation. The investor also needs to be well versed with legal requirements before making a venture into the real estate industry. The government needs to take necessary measures to lower inter bank lending rates.

References

Diamond, Jared. Collapse: How Societies Choose to Fail or Succeed. N Y: Penguin, 2005.