Our PESTLE Analysis of The Real Estate Industry examines what political, economic, social, technological, legal and environmental factor affect the industry.
Are you a person who knows the insight of one of the biggest industries in the world, the real estate industry? If you don't, then you must!
The global real estate industry is worth trillions of dollars. Investing in this industry sanely allows you to easily make a couple of millions for yourself. At this point, you must think about where to start to gain insight into the real estate industry.
Well, consider yourself lucky since after reading this article, you will gain a complete insight into the real estate industry because, in today's article, we will conduct a PESTLE Analysis of The Real Estate Industry.
Before proceeding further with the PEST analysis, let's discuss the history and some of the major developments in the real estate industry.
People have been purchasing and selling land since ancient times. The need for land has always existed, whether for agricultural purposes or settling.
In the middle ages, feudal lords mainly owned the land, and peasants used to work for them. In those times, land registries didn't exist, due to which people would have land disputes.
Europe established land registries to solve land disputes in the 17th and 18th centuries. This formalized land ownership and played its part in settling land disputes.
In the coming centuries, the demand for land grew enormously due to the industrial revolution. As the industrial revolution began in the 18th century, land was required to establish factories and houses. Due to the increasing demand for land, its prices increased significantly.
As the sale and purchase of land increased, real estate brokers entered the market. They played the role of intermediation between buyers and sellers of land. Brokers facilitated transactions and helped the real estate industry to grow.
The growing real estate industry of the US received its first blow in 1929 due to the great depression. During the great depression, the purchasing power of the people fell, due to which the demand in the real estate industry fell, and the industry suffered.
The great depression ended in 1939, and slowly the real estate industry got at its feet again. The real estate industry experienced rapid growth after World War 2. Urbanization started as people and governments started spending on development projects.
In the 1960s, the real estate industry grew rapidly after REITs were established. For the first time, REITs allowed people with less savings to invest in the real estate industry.
Moreover, technological advancements and growth in the financial markets also made it easy for people to invest in the real estate industry. All these factors caused growth in the real estate industry.
The rapid growth in the real estate industry caused the price of land to inflate a lot more than its intrinsic value. The real estate bubble finally busted in 2008, and the price of land fell significantly.
The real estate industry is considered one of the biggest industries globally. The value of the global real estate industry was estimated to be over $7 trillion. The industry is further expected to grow in the coming years.
Now that we have discussed the history and major events that affected the real estate industry, let's proceed further and discuss what a PESTLE Analysis is.
PESTLE analysis is a tool used to analyze how various external factors impact any industry. Today's article will discuss how political, social, environmental, legal, technological, and economic factors impact the real estate industry.
Political Factors That Affect The Real Estate Industry
Political factors are the factors that are related to the policies made by the government and the political environment in general. This section will discuss how different political factors impact the real estate industry.
Governments impose taxes on different industries, including the real estate industries. These taxes impact the real estate industry significantly.
For example, suppose the government imposes more taxes on the transfer of property or possession of land. The demand for real estate will fall, and the prices of land and property may fall too.
Similarly, suppose a government imposes more taxes on its people in general. In that case, people's disposable income will fall, so only a few people can afford an investment in the real estate industry.
Moreover, government spending also has a great impact on the real estate industry. Each year governments decide how much money they will spend on development projects.
Suppose a government increases its expenditure on infrastructure and development. In that case, the value of real estate in the area where the development project will also increase.
Other than that, political stability also greatly impacts the real estate industry. If a country is politically stable, the people investing in real estate would know that the laws related to real estate won't be changing any time soon, so investors would have the confidence to invest in the real estate industry.
On the contrary, in case of political instability, investors wouldn't have enough confidence in the market, so the demand for real estate will fall.
Economic Factors That Affect The Real Estate Industry
Economic factors have a great impact on different industries. In this section, we will look at how different economic factors impact the real estate industry.
Interest rate is a macroeconomic variable that impacts the real estate industry significantly. The interest rate determines the level of consumption in the economy. If the interest rates are high, people tend to save the excess money in banks to earn a higher rate of return.
On the contrary, when the interest rates are low, people don't get high returns on savings; that's why they take out their money from the banks and start investing in different industries, including the real estate industry. This is why the real estate industry grows whenever there are low-interest rates.
Besides the interest rates, employment levels also impact the real estate industry. Suppose an economy is experiencing high employment levels; in such an economy, people will have higher disposable incomes.
Hence, in economies with a high level of employment, the demand in the real estate industry would be high since more people have the money to invest.
Furthermore, inflation has a deep impact on the real estate industry. In economies with higher than the normal inflation rate, the disposable income in people's pockets fall. Due to this, the demand in the real estate industry will fall.
Similarly, economic booms and recessions greatly impact the real estate industry. In times of economic booms, people have a higher living standard and more money to spend. Hence, the real estate industry expands during economic booms since more people invest in it.
On the other hand, the real estate industry shrinks during global recessions since people's purchasing power falls, so fewer people become interested in investing in the real estate industry.
Social Factors That Affect The Real Estate Industry
Social factors are the factors related to society and culture that affect different industries, such as real estate. This section of the PESTLE analysis will discuss the social factors that affect the real estate industry.
Demographic factors such as the population growth rate greatly impact the real estate industry. If a society has a high rate of population, then the demand and prices of real estate in such societies would definitely be high.
However, in countries where the population growth rate is low but the land is sufficient, the prices and the demand for real estate are low.
Moreover, the rate of urbanization also determines the value of real estate in a country. Countries that experience a high rate of urbanization also high priced properties because the demand for land is more than the supply.
Other than that, in some societies investing in a tangible asset like property is considered a safe investment; that is why real estate industries in some countries are growing very fast.
Technological Factors That Affect The Real Estate Industry
Technological innovations and advancements have a great impact on different industries. Let's take a look at how different technological factors impact the real estate industry.
As technological advancements have taken place, modern software and data analytics techniques have emerged, which help people in the real estate industry forecast property prices and make well-informed decisions accordingly.
Mobile apps related to the real estate industry have also been developed. These apps facilitate the process of renting, buying, selling, and leasing of property. As a result, the present complications have been overcome, and now more people have entered the real estate industry, making it big.
Besides that, the emergence of crowdfunding platforms has transformed the real estate industry. Earlier, people who had huge sums of money could only invest in real estate.
However, as these new platforms have emerged, which allow people to pool their money to buy a collective property, the participation of people in the real estate industry has increased, and more people have started investing in the industry.
Legal Factors That Affect The Real Estate Industry
Legal factors are the factors that are associated with the laws and the legal framework of a country. In this section, we will discuss what legal factors affect the real estate industry.
Property rights have a significant impact on the real estate industry. Different countries have different property rights, which define land ownership.
Every individual has to abide by the property laws of their respective country, or else they can end up in jail or have to pay heavy fines for violating the law.
Other than that, environmental laws also impact the real estate industry. In every country, certain pieces of land are marked as natural parks or green belts. These pieces of land cannot be sold or bought by any individual.
Suppose anyone violates such environmental protection laws by using the land that is kept aside by the government to protect the environment. In that case, strict legal action will be taken against them.
Moreover, the terms and agreements in the real estate industry should be drafted in light of contractual laws set by the government; otherwise, strict action would be taken against the law violators.
Environmental Factors That Affect The Real Estate Industry
Environmental factors are the factors that are related to the environment. Let's see how different environmental factors impact the real estate industry.
The real estate industry is strictly criticized for cutting trees and destroying natural habitats to develop the land so that it can be sold. Environmentalists criticize the expansion of the real estate industry since they believe it is destroying the environment.
Besides that, environmental hazards have an impact on the real estate industry. A piece of commercial land may lose its value if the water table of that land rises due to global warming and the groundwater starts flooding.
Moreover, forest fires are becoming common due to global warming. Properties near forests may lose their value since investors may see them as risky investments.
PESTLE Analysis of The Real Estate Industry: Final Word
The real estate industry is one of the biggest industries in the world. In this article, we discussed the history of the real estate industry to see how it functioned in different eras. Then we discussed the evolution of the real estate industry.
Many historical events played a significant role in shaping the real estate industry. After that, we discussed what PESTLE analysis is and why it is used.
Then, we proceeded further and conducted the PESTLE analysis of the real estate industry. The PESTLE analysis framework helped us in analysing how different external factors impact the real estate industry.
We assume that you would have enjoyed reading this article thoroughly. If you are interested in knowing more about PESTLE analysis, do look at some of its examples.
