How does economic uncertainty affect real estate?

Reeling from the impacts of a pandemic, we’re on the cusp of another global recession. Stock markets are seeing an unprecedented bear run, the cryptocurrency market has crashed, interest rates are at an 11-year high, and the rupee is on a downward trajectory in value.

This economic uncertainty impacts developing countries more than the developed world.

Economic uncertainty is defined as a situation in which the future outlook of an economy is unpredictable. This may arise due to various reasons, including political instability and incompetent policies.

Uncertainty's impact on the general economy is perpetuated in the form of negative sentiments or expectations about the current or future economic situation. This gloomy sentiment eventually translates into adverse spending and investment patterns throughout the economy. Consequently, resulting in negative growth and income levels.

How does uncertainty impact individuals, governments, and businesses?

For individuals:

During uncertain times, individuals are often worried about their job prospects, income, savings, and their future financial well-being. As a result, they become increasingly cautious with their spending patterns, cutting off all unnecessary spending.

For governments:

Governments strive to find the right balance between the policies to bring the country out of uncertainty (which might include taking some harsh measures) while also maintaining the population's standard of living and protecting their buying power.

For businesses:

An economically uncertain time may upset a firm's targets and budgets as consumer spending adjusts according to the situation at hand.

To be precise, the way a firm embraces economic uncertainty may differ according to what industry that firm belongs to. The agriculture industry may remain unaffected because agricultural products are necessary goods with relatively inelastic demand. Consequently, the industry may continue to operate normally. Similarly, the education sector may also continue to function as usual.

However, industries linked with luxuries or investments might have a different reaction depending upon their niche. For example, people might flock away from purchasing new vehicles due to an uncertain economic future, negatively impacting the auto industry, but as a consequence, the auto repair industry may even profit from the uncertainty as people move towards repairing the ones they already own.

The impact on real estate

The real estate sector powers over 70 other industries. This proves that the functioning of the sector is essential for the economy. An impact on this sector would result in massive losses to the numerous other industries that feed off of it. This is why the real estate sector is often granted subsidies and special amnesty schemes by governments, as also recently seen during the COVID-19 pandemic.

Overall, economic uncertainty can have a varied effect on the industry, depending on if you're on the supply (developer or builder) or the demand side (homebuyer or investor).

The supply-side

As economic uncertainty slows down new developments, the demand for building materials also plummets. This might be a blessing in disguise for developers and builders, especially those with ongoing developments. As demand shrinks, supplies take time to adjust. As a result, building materials are generally available for cheaper. Steel, which makes up a considerable chunk of the construction cost, is often cheaper during uncertainty.

This will prove to be a big plus as developers who have accounted for rising costs over the construction period will now be able to purchase materials at much cheaper rates than they had planned. These low costs will also ease the barriers to entry for new players in an industry that requires a massive amount of capital investment, encouraging competition.

However, during times of economic uncertainty, the monetary policy is often bumped up to stop the economy from spiraling out of control, resulting in increased borrowing costs. This will, indeed, adversely affect those looking to operate on credit. Moreover, with the real estate industry being dependent on several other industries, slower activity in the industry will also impact those industries, leading to an overall worse-off economy.

The demand-side

For investors, however, the impact may be different altogether. An unpredictable economic future will deter investment. Real estate is a high ticket item, and while less risky than multiple other investment avenues, an investment of this size requires a robust economic outlook. Consequently, investment in the market tends to dry up as the supply and demand gap widens.

With fewer people willing to invest, people who are looking to exit the market will also find it difficult to do so. In an already illiquid market, the suppressed demand will eventually lead to a slow market.

For potential homeowners, this might present a different outlook. As the demand for real estate falls, prices also fall, providing relatively cheaper investment options for end-users or those looking to enter the market as investors. These lower prices also allow people with moderate financial standings to enter the real estate market, especially millennials.

Making the most of uncertainty

Markets often operate within these economic cycles. A bear run is always followed by a bull run and vice versa. The best returns are guaranteed to those who wait out economic booms and enter the market when the prices are lower. The best practice would be to plan your investment strategies during market booms when prices are sky-high and execute those strategies once the economy has a much more positive outlook.

Furthermore, opportunities like fractional ownership, where you can purchase fractions of real estate instead of entire units, ease the financial barrier to entry and allow investors to diversify their portfolios without shelling out a fortune. DAO PropTech is one such platform hoping to enable fractional ownership in Pakistan and make real estate accessible to the masses.

In an interview, our Chief Vision Officer, Jawad Nayyar, said, "DAO PropTech's vision is to empower the masses to start their journey towards real estate ownership. We believe in creating an ecosystem that is built not only for the select few, but for everyone." Appreciating SECP’s concept note on asset fractionalization, he said, "By allowing for fractional ownership, you not only eliminate the high cost of entry into the market and increase liquidity in an otherwise illiquid market, but you also enable an industry that further feeds numerous other industries, boosting the economy and eventually finding the way out of economic uncertainty.”

Finally, it is fair to say that economic uncertainty may only be what you make of it. Plan and execute well, and you may even benefit from it.

Esa Imran

Marketing Communications Associate