Other than regulating the securities market, the government often distances itself from active roles in this sector. However, the role of government, which is often viewed as passive is the very cornerstone and pillar that holds the real estate sector.
Some of these roles include:
Federal Monetary Policy
Monetary policies are by far the most powerful tool that influences real estate. Unfortunately, it is also the most imprecise. As much as the government can do some fine control with tax policy to move capital between investments by granting favorable tax status, they, however, tend to go for large, sweeping changes by altering the monetary landscape.
Although interest on borrowed funds and savings is usually considered to be an economic influence, the federal government can definitely affect the level of interest rates.
Furthermore, through monetary policies, governments can indirectly involve themselves in the market by adjusting interest rates and taking part in open-market operations. In theory, cutting rates will discourage investors and companies from putting their money into fixed-income investments – the lower rates instead may encourage borrowing for investment purposes.
Governments are the only entities that can legally create their respective currencies. When they can get away with it, governments always want to inflate the currency. This is because it provides a short-term economic boost as companies charge more for their products and it also reduces the value of the government bonds issued in the inflated currency and owned by investors.
The federal government generally seeks to maintain a proper balance between economic growth and inflation and tends to manipulate monetary policy to this end, which they do by changing the discount rate for funds furnished to member banks. This way, the Federal Reserve can have a direct influence on the level of interest charged for these funds to be loaned to individual consumers for construction loans or mortgages.
Inflated money feels good for a while, especially for investors who see corporate profits and share prices shooting up, but the long-term impact is an erosion of value across the board. Savings are worthless, punishing savers and bond buyers. In addition, interest rates shoot up, making borrowing very unattractive.
Bills and Laws
The market is also affected by the bills and laws passed by the various levels of government. This can occur for those laws directed specifically at the securities market or those that have an indirect effect.
Also, labour laws can have a major influence on a business’s choice when building or relocating a facility. A company may decide for or against a certain location because of certain labour laws and regulations, including whether or not labour unions are prevalent.
Fiscal policies that affect the taxation of capital gains, dividends and interest gains may eventually have an effect on market activity. For example, favorable policies such as tax cuts could persuade investors to become more active in buying and selling securities, while unfavorable policies might cause individuals to move to fixed-income securities or alternative investments such as real estate.
Interest rates are another popular weapon, even though they are often used to counteract inflation. Dropping interest rates through the Federal Reserve, as opposed the raising them, encourages companies and individuals to borrow more and buy more.
High taxes on corporate profits discourage companies from coming into the country. Just as states with low taxes can lure away companies from their neighbors, countries that tax less will tend to attract many corporations. What subsidies and tariffs can give to an industry in the form of a comparative advantage, regulation and tax can take away from much more.
Higher city and/or state income taxes result in less disposable income for real estate purchases. Although high-income taxes are not good for homebuilders, apartment landlords may fare quite well because their tenants cannot afford to buy homes.
Subsidies and Tariffs
Subsidies and tariffs are essentially the same thing from the perspective of the taxpayer. However, In the case of a subsidy, the government taxes the general public and gives the money to a chosen industry to make it more profitable, while in the case of a tariff; the government applies taxes to foreign products to make them more expensive, allowing the domestic suppliers to charge more for their product. Both of these actions have a direct impact on the market.
Government support of an industry is a powerful incentive for banks and other financial institution to give those industries favorable terms. This preferential treatment from government and financing means that more capital and resources will be spent in that industry, even if the only comparative advantage it has is government support.
Quality of Amenities and infrastructures
The quality of schools, hospitals, fire stations, police stations etc., in a certain area may place a neighborhood, area, or even an entire state in a competitive advantage or disadvantage relative to another neighborhood, area, or state.
When it comes to these basic societal needs, the government is either directly involved in providing them or in the laws that govern them, and by implication having an indirect effect on the real estate sector.
REAL ESTATE UNITE 2016
In the theme of this year’s Real Estate Unite, we have identified ‘the Government GAPS’ to be filled in the Nigeria real estate sector.
We will be identifying more ways in which the government can positively impact Nigeria real estate as well as proffer solutions to existing problems in this sector.
To attend this event, register on www.realestateunite.com or send an email to email@example.com