However in the reverse scenario, with property prices stagnant or dropping (as is the current case in the US), the opposite happens - consumers stop spending. In California (the worlds 6th largest economy) it's been estimated that real estate is responsible for 60% of job creation in the past few years. With real estate hitting a brick wall what's going to happen to those jobs?
And in a new report from ABSA it seems that real estate in South Africa is playing a greater role in our economy than ever before.
THE country’s residential property market has become much more important as a contributor to economic growth and development over the past few years, says the latest quarterly report on the residential property market by Absa.
Absa senior economist Jacques du Toit said the real value of fixed property investment excluding inflation increased to R23,8bn in the third quarter of last year on a seasonally adjusted annual rate from R10,9bn in 1999.
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You would have thought that because people's homes have rocketed in value, their debt would have decreased - instead, stats show that the average US persons debt has rocketed in recent years- a large reason for this is that as the homes increased in value, owners took that money out and spent it - which is why the economy boomed. Now that house prices have stopped going up, the amount of equity removal has decreased $500 billion ! That is a huge chunk to suddenly be removed from the economy - which means tough times ahead. The Guardian newspaper reported that 1.4 million jobs were created by the housing boom in the last 5 years - as the market turns it is estimated 73000 jobs will be lost a month.
The US is heading for a recession, possibly even a depression.
The SA boom in recent years is very much tied up with people feeling very rich as their properties have increased in value by millions - when the market turns, spending will grind to a halt and tough times will happen. The US is showing us where we are heading ... only our bubble is even bigger...
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