Higher property prices indirectly benefit other industries
Article by Mozo
While the debate over rising property prices rages on, it is also worth noting that housing costs don’t just affect home owners and buyers. In fact, according to IBISWorld, housing prices also have a palpable impact on other industries such as construction, retail and motor vehicle industries.
In the short term, higher property prices have a positive effect on these industries, but if the prices significantly drop in the long run, it could have a negative impact on construction activity and also potentially dampen retail sales. This is a result of the fact that rising property prices give developers an incentive to build new housing, driving demand for residential construction industries.
Here’s how the property prices affect different industries:
With the increasing demand for residential construction, employment in these industries also goes up. The catch however, lies in the difficulty that developers face in differentiating between price rise because of fundamental factors like limited supply, and those leading from speculation. The danger here is that in case there is significant construction of new housing as a result of unwarranted price hikes, the housing market can become oversupplied, which could then lead to a prolonged period of subdued demand for new dwelling construction and lower levels of industry employment.
Generally, rising housing prices impact retail sales through what is called the wealth effect. In simple terms this means that when residential values go up, household wealth increases, which boosts consumer sentiment thereby inducing spending. But perhaps because of the current pressure on new homebuyers to save a larger part of their income for a hefty deposit, the retail segment in Australia has yet to feel the positive effects of higher residential housing prices. Secondly, consumer sentiment has been volatile over the past five years, due to general economic uncertainty.
Motor vehicle industries:
Motor vehicle dealers are almost certainly reaping some benefit from higher property prices. As dwelling property values have gone up, many owner-occupiers have decided to refinance their mortgages in order to access some of the equity built up in their homes, while also taking advantage of lower interest rates. Some of these homeowners have then also used this opportunity to buy a new vehicle with their freshly released equity.