Our Real Estate Blog

the question is what will look like the new engine of economic growth?

October 29th, 2008 9:37 AM by Lehel Szucs

The day after

Now, when the real estate industry in too many countries undergoes serious changes, the question is what will look like the new engine of economic growth? The era of ever-increased and ever-easier bank credits may be over, at least for now. The main alternative, the governmental-backed projects, is also not very practical; the leading proponents of this option are also in deep debts. The industry wants good and clear legal and financial environment, like the one many countries, now in crisis, experienced for so many years until now. Some sort of solution will eventually be found, a proper mix of private investment and public incentives. The question isn't whether it will eventually go into crisis too, it will, but for how long it would be able to meet the demand for new global development.

One of many ironies of the current situation on the real estate market is that its emphasis on the private initiatives followed from the premise that the risks should go to the private entrepreneurs only and the benefits should be distributed among the society in general. As a result of the current financial crisis, the risks or rather the bad outcomes of the risks were 'nationalized'. The public in general, not only in the United States but also in Western Europe and elsewhere will have to pay for the unsold houses, foreclosed properties, bankrupted banks, the finally, for the broken trust that the private risks will remain private in all circumstances. Now, when the trust in the 'system' is shaken, what are the alternatives?

The easiest and most readily available answer is to look to the governments on all levels. As the society is going to pay after all, isn't it for the society through its democratically elected officials, to decide on the new developments, not only from political but also from financial point of view. This answer seems logic and simple, but it will hardly be followed by real policies. Those governments, for historical reasons best prepared to intervene in the economy, are financially even deeper in debts than the Untied States today. Look at Japan or at Italy. Their debts are twice or three times the size of the U.S. federal debt, all other things like population and size of the economy taken as equal.

The United States is in better shape to 'go public', but its political system is constructed in such a way as to prevent the concentration of power, not to produce effective and efficient political decisions. Those who mistrust the U.S. federal government are right on several issues. It can make fair decisions regarding the respect of different state and community interests, but it cannot make decisions that follow the simple economic logic of efficiency. If it could, we would have already known it.

The real estate industry, however, needs clear and simple, and predictable environment, both legal and financial. If the financial incentives don't come from the private banks or from the government, how the industry will turn the corner and start growing again? An additional problem comes from the demographic crisis; fewer new people on the market cannot demand for ever-increased number of houses unless they aren't far better paid, therefore the solution for the current real estate crisis cannot come out without general improvement of the living standards. By this I mean taking measure of integrating as many as possible people from the lower classes into the middle-class. This may sound as cheap populism, but given the current situation of reverse trends, the financial 'bleeding' within the middle class will get the current financial situation even worse. The dilemma isn't between the market and the government, but what is the proper ratio between the private initiative and the public incentives to bring back to work the main engine of growth.

Posted in:General
Posted by Lehel Szucs on October 29th, 2008 9:37 AM

Archives:

Categories:

My Favorite Blogs:

Sites That Link to This Blog: