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Housing: Small Economic Sector With A Big Impact

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http://www.nytimes.com/2014/07/02/upshot/housing-small-economic-sector-with-a-big-impact.html?ref=business&_r=0

Housing is a pretty tiny part of the economy. But housing also plays an enormous role in creating economic booms and busts. This is one of the most important paradoxes of how the economy works that policy makers are only now starting to grapple with adequately.

In the United States, residential investment is about 4 percent of total economic activity in normal times, and about 3 percent lately. But it experiences far more extreme ups and downs than the economy as a whole, especially over the last decade. Spending on food and beverages is a larger share of the overall economy, but you never hear of a recession being triggered by a downturn in the grocery store and restaurant industries. In 2008, overall G.D.P. fell 2.8 percent. Residential investment fell 24.3 percent.

The Wild Swings in Housing

When the total economy shifts, the housing market rises or falls much more sharply.

Year–over–year change in residential investment and overall G.D.P.
%
+10
0
-10
-20
Residential Investment
Total G.D.P.
2000
2002
2004
2006
2008
2010
2012
2014
Source: Bureau of Economic Analysis

But that’s only part of the reason housing is so important to economic cycles despite its relatively small size. A home is not just something people consume; it is also in many cases their largest asset. So swings in home prices can change individual’s perceptions of their wealth (and hence their spending on everything else).

You see nothing catches out the experts....

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Only this way becuase central banks drive misallocation of capital.

It suits the retail and investment banks and the government. All of which they please whilst pumping inflation and devaluation through the system to screw the wider population in general.

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There is decent evidence that a number of other countries are experiencing new housing bubbles — mostly, advanced nations that skirted the worst of the last downturn like Canada, Germany, Australia and the Nordic countries. But even seven years after housing was at the root of a global crisis, there are still no solid answers as to what exactly constitutes an economic risk and how policy can combat it.

...

...

These are baby steps. The evidence of whether economic policy makers have really learned anything about how to avoid the boom-bust cycle in housing that brings the rest of the economy along with it will come with the next downturn. But in the meantime, the research by the I.M.F. and action by the Bank of England are early and important examples that American officials will want to study closely as they try to figure out how to rein in the kind of boom-bust cycle that has had such lasting consequences.

So they're saying they've learnt nothing from any of the previous recessions/downturns including the latest one and they have to wait for the next one. They don't even know the answers to what constitutes an economic risk never mind how to combat it.

What will they say when the next downturn comes - wait until the one after that.

Believe them? - thousands wouldn't.

It's beyond incredible.

Edited by billybong

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In the United States, residential investment is about 4 percent of total economic activity in normal times, and about 3 percent lately.

That sounds as if the "residential investment" they're considering is only the money involved in building and fitting out new housing and associated infrastructure - plus refurbs etc. That is the construction/building component of the economy.

So that would only touch the surface of the total economic activity. Perhaps if the article had said something about the total debt lent on all residential property (new and existing) as a proportion of total economic activity it would have given a fuller and more useful picture.

Edited by billybong

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Some one has to fund ever fattening banks, hence the needed for ever increasing housing costs.

We need a gastric band for the banks.

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