Real Estate and Construction

There is a very close relationship between the real estate sector and the construction industry. The level of construction activity is one of the key mechanisms by which changes in real estate prices are transmitted to the wider economy. Although new commercial developments such as malls and large office blocks catch the eye, it is the housing sector that has most influence on the level of construction activity. Booming in house prices will almost always destabilise an economy because GDP growth and jobs become ever more dependent on the construction sector. When a real estate boom ends, as it always does, construction jobs disappear very quickly as in Spain and the US after the GFC. Moreover, oversupplied real estate markets take a long time to clear. Theoretically, when real estate markets become overheated, rising costs act as a natural break on construction activity. However, the globalisation of the construction industry in recent years, particularly through labour migration, has reduced this self correcting mechanism. The articles in Chapter 7 explore the main economic and property market influences on construction costs and output, and comment on the global construction boom of 2007.