Capitalism and Real Estate Essay Example

Introduction

The real estate sector is the epitome of capitalism. Given the role of real estate in society, sellers have an ever-increasing demand for their products. Therefore, producers continuously seek new methods of producing the all-important good. If the producers overproduce, the prices go down. Similarly, real estate provides financial providers with a unique market where finances are constantly needed. However, the real estate sector is complicated with lots of difficulties. To some extent, overreliance in fixed capital may inhibit profitability and limit capital accumulation. Real estate is also capital intensive limiting its market to a dominant section of the society. The real estate market becomes harder to categorize as monopolistic, oligopolistic, or free market. One reason is that the real estate sector experiences high competition for a prime location and its prices are often defined by forces in the market. Whenever such forces are opposed, the situation may lead to a collapse in the economy in general, if not a recession. Real estate is the future of capitalism as the demand is always rising. The following paper discusses the concept of capitalism in the real estate.

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A real estate is an investment in perpetuity. A building can last for years needing only a few changes, renovations, and improvements. It is also likely that the business owner/investor can also be the consumer of the product. This makes real estate a unique form of business and asset ownership. Another source of uniqueness is the fact that all units are unique in terms of ownership structure, building blueprint, value, and cost. As a result, there is no similarity in the valuation of real estate making pricing difficult. Product differentiation is the main source of heterogeneity of the products in this industry. Therefore, the free market determinants of prices, supply and demand do not apply. Most investors determine the prices based on the cost of production. In addition, prices for these products are continuously rising as a result of the consistent rise in demand for housing.

It is highly likely that the population expands faster than the expansion in the real estate especially residential real estate. The commercial real estate has a different trend in production and demand. However, a similar slag in development is evident in the developed countries. Similarly, industrial real estate experiences a slag in development but demand for this type of real estate is not as high as in residential. The land is generally constant as it is impossible to change the supply of land. It is mainly the uses of land that change through development, subdivision, and farming. However, changes in the value of land are common and exchange between users and owners remains the main form of business involving land. However real estate involves lots of markets where buyers and sellers exchange properties.

Characteristics of Real Estate Markets

The real estate business involves the transfer of private property, whether land or building, to another person for money. A capitalist economy relies on private property rights and laws. In addition, capitalism relies on free market forces that determine supply and demand and set prices. A free market economy refers to a situation where supply and demand forces determine the prices. The competition between suppliers pushes the prices down while the demand from the buyers pushes the prices up. In the property market, free market forces apply. Sale and purchase of properties are based on the ownership and ownership rights. Therefore, buyers are sellers rely on the property rights for protection and proof of ownership. In modern society, real estate exchanges occur through trade, where the buyer exchanges the property of money. The exchange also occurs in form of inheritance or a gift from family or friends.

Real estate is based on the most efficient economic form. As it is based on capitalism, real estate promotes the expansion and growth of the economy. Real estate creates the need for maximization of value through incentive. The owner of the property literally owns the equivalent of the value of that property in terms of currency or any other medium of exchange. Therefore, the more valuable a property is, the more valuable the owner is. Owners derive their motivation to develop and maximize the value of their property by this form of incentive. Property development becomes a source of income or a source of savings to the owner. As a result, property development leads to economic developed and improves economic efficiency. Property development promotes growth through the investment or savings multipliers. As savings grow, the marginal propensity to invest grows and more sources of income arise.

Owners of private property have the freedom to transfer property with ease and at the prices of their choice. Rights and freedoms to transfer property ease the transferability of real estate properties making is tradeable and flexible in price determination. However, product prices are highly differentiated in this industry. Price setting is usually at the discretion of the seller or the producer. Mainly those who control capital, which is the main factor of production in this industry, dominate the industry. Hence, the industry portrays some characteristics of a monopolistic competition. The market has a large number of sellers in form of multiple firms and developers. There are free entry and exit of firms into the market. The product is highly differentiated but buyer knowledge is limited (Telser, 217). The products are highly immobile and the demand is elastic. The sellers in a monopolistic market have the autonomy to control prices and output. The firms are also highly independent of other firms. Therefore, firms hardly react to competitor developments and changes. Since the products are highly differentiated, the sellers are forced to spend lots of money on advertisement.

Trends in Real Estate

The global real estate market has been on the rise since the recovery after the 2008 economic recession. The recession was mainly a result of a terrible failure in real estate financing, the bursting of the United States real estate bubble (Shiller, 2008). It was a period of general economic decline in different world economies. The recession extended for more than a year leading to the collapse of the banking industry. The main cause of the massive failure was the result of non-performing loans. The Federal Reserve failed in its mandate as the banks' regulator by allowing the continued rise in unrealistic mortgages. Another cause may have been the fact that financial firms engaged in risky businesses by giving too many loans. As a result, the percentage of non-performing loans grew to uncontrollable levels. However, the economy has since recovered after a massive bailout from the United States government.

With the developments in policies and laws governing both the real estate industry and the financial sector led to a gradual improvement. According to Mathews and Shafran (2015), the real estate industry in the world recorded the highest investment since 2007. The worldwide industry investment in 2015 was a massive $ 877 billion. A special combination of factors controls the changes in the industry. Location is a key determinant of investment followed by sources of capital. The types of investment have also changed since 2007 with a focus on apartments, hotels, student housing, and retail properties dominating the industry (Williams and Shafran, 2018). Investors have continuously expanded their market range by investing in upcoming cities. In addition, consumer confidence has evolved and has been on an increasing trend since the recession recovery.

Similarly, the investors have focused more on the internationalization of investment. Governments have played a major role in the internationalization process in many countries. A good example is the French and German governments which have played significant roles in boosting and offering guidance to internationalization (Wijburg & Aalbers, 2017). Through laws and control over the financial sector, the state has played a more involved role in promoting development in the industry. Most Europe, Middle East, and Africa (EMEA) countries are capitalistic in nature and have relied on competition to boost growth in the industry. Internationalization, especially due to free trade policies, has enabled investors to engage in cross-border trading. Also, differences in demand have continuously boosted cross-border trading. For example, according to Williams and Shafron (2015), the rise in real estate demand has supported internationalization heavily. Major countries that have focused on the internationalization of investment include the United States, Germany, France, Singapore, and China. Laws and regulations have also played a major role in the developments witnessed in the period after the recession and recovery. A survey by the Urban Land Institute (ULI) shows investor and consumer confidence are high. The rise in confidence is associated with an improvement in the industry fundamentals (ULI, 2018).

Future Prospects of the Industry

The real estate industry indicates a growing trend making it a promising industry filled with investor and consumer confidence. According to the ULI survey (2018), the industry has a prospect of reaching $450 billion in the United States market alone. $450 billion is more than half of the world's actual figures in 2015, which stood at $877 billion. The industrial focus is also changing and players in the industry expect it to experience further changes. As of 2015, the industry focused on newer prospective markets in form of hotels, student housing, apartments, and retail properties. In 2018 and beyond, ULI (2018) predict a focus on two newer prospective markets. One is the industrial sector, which investors expect to grow and outperform the market (ULI, 2018). Two is the focus on single-family, where investors expected single-family housing to grow to 987,500 houses (ULI, 2018). Developments in the United States are relatively similar to the developments expected in the rest of the world. The only major difference is the source of motivation or the drivers of the developments in the world real estate future development.

According to PWC (2014), the majority of the real estate developments will occur in developing economies between 2014 and 2025. By 2025, PWC (2015) predicts that 60% of the world investment in real estate will include construction in emerging markets. Asia's emerging market will constitute a bigger share of the construction. PWC (2014) associates this trend with sovereign wealth funds' (SWFs) activities. As SWFs compete for prime assets, a majority of them have seen the prospects in the real estate industry and continue to invest in the industry. PWC (2014) also associates the trend to the formation of new companies, especially regional and local asset management firms. Cross-border capital flows will also be on the rise due to the growth of internationalization of investment between regions. The future of the industry heavily relies on free trade policies as prospects lie in the internationalization of investment. The industry is capital intensive and relies heavily on capital investment. Therefore, the growth in capital from international markets creates room for growth in the developing economies.

Sustainability is another source of change and emerging trends in the industry. A major trend will involve relocation and redesign of cities and buildings to cope with the emerging trends like eco-efficiency. PWC (2014) predicts that major cities in developed economies will succumb to eco-efficiency pressures and force buildings to have sustainability ratings. New cities will emerge in f...