Macroeconomic effects on Real estate Markets


The real estate market does not operate in a vacuum. It is essential to have a view on how macroeconomic events affect the relevant real estate markets, both directly through trade and growth and indirectly through the financial markets.

In the recent years, global real estate markets have been subjected to difficult times. They are under a strong influence of crisis factors from the financial sector which are integrated in the real estate market system. Property markets in all over the world respond differently to a crisis situation. A group of countries with economic problems encompassing the financial sector and fundamentally affecting the property market has entered a crisis phase. In another group of countries with fewer economic and financial problems, the real estate market has been undergoing stagnation.

Some property markets have also proven to be insusceptible to the processes of crisis and stagnation. In each of the designated groups, the processes occurring in real estate market are subject to different impulses. This depends on the financial and economic situation of a given country over the recent years.

The housing market is defined as one where housing services are allocated by the mechanism of supply and demand. One of the characteristics of the housing market that differs from the goods and services markets is the inelasticity of housing supply. Housing services are one of the most expensive household expenditures.

Changing housing prices have been of concern to both individuals and governments. This is because they influence the socio-economic conditions and have a further impact on the national economic conditions. Expectations of capital gains from housing investments affect housing prices by increasing the demand for housing, which in turn causes high volatility in housing prices .This leads to an increase in housing prices since the supply of housing cannot adjust in the short run. The housing market can be influenced by macroeconomic variables, spatial differences, characteristics of community structure, and environmental amenities.

Real estate assets are heterogeneous, that is, their characteristics vary. Hundreds of factors might affect prices in various situations. Interaction effects and non-linear relationships between prices and hedonic variables complicate the issues. This is why people interested in the prices of particular real estate assets need to consult valuers who will collect and interpret recent sales evidence. This is in order to arrive at a price estimate based on interpretation of differences between real estates.

The latest turn from boom to bust and to crisis started with troubles in the sub-prime mortgage market in the US in early 2007. Initially, these troubles were thought to remain well contained. But in the summer of 2007, the sub-prime crisis turned into a wider US housing market downturn and financial crisis that spilled over into Europe and the rest of the world. Following the Lehmann default in September 2008, the financial crisis deepened. In early 2010, and after a severe economic downturn coupled with expansionary fiscal programs, a sovereign debt crisis emerged in a number of countries especially in Europe.

Developments in the housing market have become an increasingly important element in the information set monitored by Central Banks. For its potential disruptive impact on financial stability, excessive asset price inflation, originating from the financial and from the real estate sector, needs to be kept under constant scrutiny (one of the lessons learned from the recent global crisis).


As to the real estate market, good/quality statistics on prices as well as on returns (i.e., rents) are essential in order to gauge the extent of misalignment of prices from fundamentals.

Although the recent financial crisis has had a global impact, the channels of these effects vary across countries. Reflecting not only differences in the structure of housing and mortgage markets, but also heterogeneity in the structures and linkages of macroeconomics. Between 1999 and 2006, house prices jumped in many nations, rose more modestly in several other countries and were flat in others i.e. Japan, Germany and Switzerland. Furthermore, while losses on non-prime mortgages have damaged the capital positions of financial firms across the globe, those losses disproportionately reflect mortgage defaults in the U.S. where an easing of mortgage credit standards played a role in the later generation of loan defaults.

Some variables are considered to be more important, that is, to have the most influence on the real estate market.

The significant variables, unemployment rate and population growth, are characteristic of developing countries and constitute a very important factor influencing the demand for real estate, thus its price.

The above mentioned variables are directly related to the fact that young married couples with children entering the labor market are mainly responsible for generating demand for real estate.

In developed countries such as Italy, basic needs have already been met so demand is generated for the purpose of prestige (higher standards of living) and investment.


Over the last 20 years, investment performance of commercial property was aligned with leading macroeconomic determinants in Australia, Canada, the United Kingdom, the United States as well as in most of the countries. While there may not have been similar coefficients in each time series and across the countries, there were similarities in the trends that were displayed by the timing and strength of relationships with gross domestic product, unemployment and inflation.


Globalization provides investors with new challenges to understand the pace, magnitude and direction of macroeconomic influences on the performance of property markets. Nowadays, even in a country thousand miles away, a macroeconomic event could affect our property investments. Knowledge on how to follow up with the macroeconomic data and understand all the related variables is very important.



Written by :

Kosta Kioleoglou REValuer (Tegova)
Chief Strategist (CSO) for the East African Region
Directοr of Engineering – Property Appraisal & Valuations
Civil Engineer Msc – DBM
Taylor Scott International


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