The Effects of Government Policies on Real Estate Sector

Preamble

While the real estate sector’s linkages with the overall economy are a relatively well-researched topic, there are fewer studies regarding the real estate sector’s link with government policies. The real estate sector is linked with the overall performance of the economy, and fluctuations in the sector can magnify the ups and downs of the overall real estate market. The Iqbal Institute of Policy Studies (IIPS) discusses the link of government policies with the real estate sector and explores how effective policies can intervene to make the sector more sustainable in this blog.

 

Research Questions

• What is the role and significance of government policies?
• What is the macroeconomic relevance of real estate?
• How are real estate and government policies linked?
  

Introduction

While the effect of government policies on the overall economy is a well-documented subject, there are fewer studies which show the correlation between government policies and the real estate sector. Governments provide the legal and social framework to maintain competition, provide public goods and services, redistribute income, and stabilise the economy. A government policy is a set of rules and principles which guides the decision-making process of a specific industry, resulting in positive outcomes which enhance the community. The real estate sector is strongly linked to the overall performance of a given country’s economy. As a result of this linkage, fluctuations in the real estate market, amplify the fluctuations in the overall economy and potentially destabilise economic systems (BoJ, 2021). Therefore, it is important to know how government policies relate to the real estate sector and how they can be used to make the sector more sustainable.

 

Role and Significance of Government Policy

Public policies are enacted by governments in response to real-world problems faced by the people. These policies often reflect the interests of different stakeholders and are mapped accordingly in collaboration with industry experts. Public policy can be interpreted in terms of only ideas or can be a collection of empirical results based on actions being taken on the ground. Policy aspects can range from regulation and subsidies to laws on the national or international level. The policy-making process starts with agenda setting, followed by formulation, legitimation, implementation, and at last, evaluation. The whole process helps in setting a direction for future government and private sector initiatives. Organisations, profit or non-profit, can keep into consideration the policy demands to better equip themselves to meet standards of business and help their growth strategy become more aligned with government objectives. A good public policy will have an inclusive representation of all the key stakeholders involved and not just the interests of a particularly influential group. This requires adequate communication throughout the policy-making process. Oversimplification of issues and failure to define the problem effectively is one of the main reasons for the failure of public policy. Therefore, public policies play a vital role in providing a long-term direction to different institutions for solving the problems of the common public. (Mackay, 2011)

 

Macroeconomic Relevance of Real Estate

Real estate is a vast field which offers a variety of opportunities and challenges. Real estate development is often used as a measure to determine if a country is developed or not. The vastness of real estate can be comprehended by realising its components. The world of real estate includes housing, regulation, governance, sustainability, issues of urbanisation, demographics, and smart and innovative cities. Real estate is directly linked to a country’s gross domestic product (GDP), employment indicators, consumer price index, monetary policy, and interest rates. Agriculture, horticulture, and forest industries also form a big part of the real estate industry. Real estate can be broken into five main categories, namely, residential, commercial, industrial, raw land, and special use. The real estate sector’s worth in Pakistan is from anywhere between $1 to $1.5 trillion (Shahram, 2020). According to the Pakistan Bureau of Statistics, the construction sector also accounts for 2 per cent of Pakistan’s GDP. Therefore, the macroeconomic relevance of real estate cannot be ignored, and real estate development should be taken as a distinct subject in public policy planning.

 

The Link between Government Policies and Real Estate

The real estate sector’s link to the overall economy as proved by a study conducted by Bank of Japan (2015), which notes the importance of monitoring real estate sector for fluctuations in the real economy. The sector has the potential to destabilise the financial system as it remains largely financed by credit. The sector is also linked to the overall economy as many households own residential real estate and the construction sector is a notable part of the economy. Policies related to economics can this impact the real estate sector by providing an impetus for future growth. Affordable housing remains a massive problem in many developing countries as rapid urbanisation, and rural to urban migration is impacting the governments’ efforts at providing housing to all the urban population. Government policies in the housing and development sector can help mitigate the crisis and facilitate public-private partnership to solve the problem. The most significant impact of government policies on real estate comes in the form of laws and regulations. There are many Acts which pertain to real estate and its transaction and ownership in Pakistan. Finance, foreclosure, tenant relationship, and many other areas are directly linked to government policy and help in regulating the sector.  Lastly, the construction sector employs the largest number of skilled and unskilled labour in Pakistan. Government policy in this area in the form of subsidies and tax reductions can greatly affect employment and growth of construction.

 

Conclusion

The effect of government policy on real estate is significant as the real estate sector plays a significant role in the overall economy of a country. Government policies not only maintain a healthy business environment but also stabilise the economy and guide decision making. As policies reflect the interests of different stakeholders, they are designed in collaboration with industry experts. The physical, financial, personal, and land-use segment of the real estate sector is all linked to government policy. A progressive and forward-looking policy which aligns real estate priorities with specific needs of our time can help Pakistan revive its realty sector for a sustainable future.