Gross Domestic Product (GDP) has long been used as a measure of the country’s economic well with special focus on contributing sectors. Real Estate is one of those contributors in combination with finance and business services. According to Stats SA, the property sector increased at an annual rate of 7,4% in the first quarter of this year. Stats SA also said that the property sector was, of the three, the biggest contributor recording a rise in mortgage advances and bond registrations.
GDP growth is considered as the main driver of property prices and rental prices, and real estate investment is an impactful and direct way in which to contribute to the growth of an economy.
To put this into perspective, there is a co-dependency between GDP and income accumulated; enough to realise a capital return from a property investment, in particular residential properties. Global research claims that median home prices correlate with GDP by between 60-95% but this obviously has dependencies and other determinants, and in the wake of Covid-19 and resulting interest rate decreases, everything is skewed.
Industry players have long thought that property should be considered a separate sector when considering GDP financial indicators, and this is truer in current times where traditional trends have run their course and new ones are emerging. Again the lowering of interest rates is a new factor swing, as is the proposed new economic restructuring modelling that the government hopes will lift SA from its recession, which before the pandemic reached our shores, was already into its second consecutive recessive quarter.
Housing’s significant contribution to GDP is, generically, determined in two different ways: residential investment, whether it’s the construction of a home, remodeling, etc and associated fee’s; and consumptive spending on housing services such as rent and utilities paid by both owners and renters. However, this is further dependent on the implementation of a well-defined and strongly protected property rights policy. Key global research reports show that the wealth of nations prosper when property rights are sound.
That said, should the asset aspect of property’s contribution to GDP be the only measure of real estate contribution to GDP? Not necessarily. For one thing GDP estimates are always historic in that they only relate to whatever period being recorded has passed and does not include a measure of wealth that is contained in a stock or asset, which may accumulate over years.
And, what about happiness?
Many studies have shown that when a certain income, or level of wealth has been achieved (among many other factors such as health, social wellbeing and lack of corruption etc), those feed into improved overall GDP growth because when people are happy, they spend more and strengthen their investment in a country. The point is that happiness does matter.
The United Nations has been publishing the World Happiness Report since 2012, and this year South Africa is ranked the bottom third, as it has been for years, at 103 of the 149 nations measured. While happiness may be subjective because it is driven by non-economic factors, even Absa Bank recognises its value by producing a quarterly Homeowners Sentiment Index. It clearly defines the concerns home owners have about the economy and how those impact on their residential property purchases, sales and rentals.
Gallup, the American analytics and advisory company, undertook a global survey with individuals across the world, asking them to rate their life satisfaction on a scale of 0-10. The headline result was clear:
the richer the country on average, the higher the level of self-reported happiness … doubling GDP per person lifts life satisfaction by some 0.7 points.
The dynamic relationship when you include happiness as the missing link, between GDP and residential property may therefore be able to drive long-term economic growth but will it raise house prices? It can go either way – a boom or a bust as it happened in the US, Ireland and Spain in the 1990s, and lower interest rates – which make us all happy – do not necessarily kick-start residential property investment nor economic activity.
Factor this in as well: the effects of interest rates on residential investment may be twice as large during a housing boom than during a housing bust, says evidence from a survey by the Bank of International Settlements (BIS), a financial institution owned by central banks to foster international monetary and financial cooperation.
It’s all so contradictory really: for every report you read that overall contentment or happiness should be included in GDP property contributions, there is another indicating that it makes no difference.
Perhaps the best measure is your individual assessment: how much are you prepared to invest in your property; how does it make you feel to own such an asset; is your property purchase safe; and ultimately how happy does all this make you?
