Real Estate Bloom

One of the drivers of growth in the housing sector was low interest rates. Some extremely low financing costs were responsible for boosting the demand for housing which in turn fueled the building of these. In the middle of the housing boom in real interest rates were negative for several years. If we add an increasing population and the need for housing for baby boom generation can understand how it was the boom of the brick.

As the economy moves.
If we analyze the elements through which the downturn in real estate is transferred to the rest of the economy we find that the fall of property prices reduce wealth (asset value) and therefore the financing capacity of individuals and companies.

The deflation of property prices has a direct relationship with the growth of GDP, credit and unemployment. In fact this fall in prices not only anticipates downturns in economic activity but in addition, is the causal part of the process of slowing down.

The construction sector is one of the more cyclical sectors with a multiplier effect on the larger economy and a more extreme variations. During the growth cycle grows above average and during the recessionary cycle also decreases more than the average. This is largely due to the long life of the investments. While the construction of a home can be lengthened to about two years demand has average maturities of ten years. This causes variations of rising interest rates reduce demand while developing promotions that catered to this demand and at completion produce an oversupply of housing in a market with lower demand and ultimately will have its impact on the price of the product .

The effect of falling house prices.
The fall in house prices has a direct effect on household wealth, as is where is deposited 80% of this. One way to offset the negative effect of this loss of wealth is reducing consumption and increasing savings. The consumption is drastically reduced when it is financed by the home warranty, a practice that has exploded in our country during the present crisis with three credits per household (mortgage, personal loan and credit card). The increase in prices led to increase the level of household debt to a high and constant upgrading of housing which encouraged consuming and that is what is known as false wealth or living beyond our means.

The price of housing also affects businesses because it causes a fall in land prices and hence of any asset property such as offices, factories, hotels, etc.. This devaluation of the assets of the companies causes a deterioration of their balance access to credit more expensive and reduces their ability to borrow.

With respect to financial institutions falling housing prices and spread of any real estate asset reduces the value of the collateral mortgage loans granted below the result of late payment and has a direct impact on profitability. This in turn has a direct impact on its ability to finance new operations and therefore reduce the Read the rest of this entry »