Macro-Economic Convergence. Property sector growth in Prague - Essay Example

?MACRO-ECONOMIC CONVERGENCE By Introduction Broadly, this empirical study focussed on the of financial development and economic growth. In specific terms, the study will seek to explore the relationship between monetary policies and real estate development. Further, the study will narrow down on the impact of interest rates on the value of residential properties in the Czech Republic (Arner, 2007, p. 63). The substance of this study is based on the premise that real estate development as an aspect of economic growth depends significantly on the nature and direction of financial development. This study will seek to demonstrate that seasons of favourable financial developments have tended to correspond to with seasons of a rise in the values of residential properties in the country. The study will also seek to illustrate the fact that inflationary pressure and other financial forces on the market have a tremendous effect on the level of economic development as represented in the value of property prices in the country. The study will use illustration of the performance of property values in the country within the period of ten years. Basically, this study will be qualitative in approach. It will combine the methods of extended literature and case study approach to determine the insights of the study with particular reference on the impact of financial developments on economic growth in the Czech Republic. Reliable and resourceful information on the financial trends in the Czech Republic will be matched to the nature of real estate development in order to establish the kind of associations between the two (Haber, North & Weingast, 2007). In order to enrich the authenticity of the study, it will be appropriate to use the most recent information for the study. Case analyses will be conducted to determine the manner in, which the financial trends in the Czech Republic impact on the aspect of economic growth (Liebscher, 2006). The trends of the values on the property markets suggest that macro-economic forces at play in the country have some significant impacts on the property development in the country. Furthermore, the study will incorporate the views of analysts in order to establish the nature of relationships that operate between the two realities. There is a sense in which the dynamics of economic growth and the trends in the interest rates affect the level of property development in the Czech Republic (Ranciere & Loayza, 2005). Generally, the study will seek to demonstrate the fact that the nature of growth and the levels of stability of the markets determine economic processes. Past and recent case analyses, economic development studies, media reports and other multiple sources have shown compelling proof of a boom in the residential property sector in the space of time of a decade in Czech Republic (Ranciere & Loayza, 2005). Various explanations from different sources have offered a range of explanations behind this development. In the opinion of analysts and industry experts, the phenomenal growth of the residential property sub-sector has impacted significantly on the property values in the country. The various sources are in concurrence with the fact that Prague remains the focal point of residential property development in the country. Few studies have attempted to determine the exact impact of the phenomenal growth in the residential property sub-sector on the value of properties in Prague (Ranciere & Loayza, 2005). However, a review of select cases indicates a consistent growth in the value of residential property prices over the past five years. Analyses of various cases have shown up to 500 percent increase in the value of residential properties in a span of a few years (Florio, 2011, p. 78). Whereas some analysts predict a consistent pattern of value increment in Prague’s property sector, others remain pessimistic expressing fears and doubts over the sustainability of the current value growth rates. Those who project a decline in the value of residential properties in the capital base their arguments on the unpredictable and fluid nature of the market. Loose regulatory mechanisms, unstable bank lending rates, geopolitical factors, and competition are some of the factors that are likely to halt or slacken the growth of property value in this industry. Competing perspectives, on the other hand, suggest that the synergies of an expanded market of the East African region, the influx of foreign actors, and the remittances of Czech Republic in the Diaspora will sustain the prevailing trends in the country (Florio, 2011). The particular case in the neighbourhood of Prague stands out as one of the most significant illustrations of the obtaining trend on the nature growth and value increment of residential properties in and around Prague. A survey of the value of properties in this area shows a consistent pattern of exponential rise in the value of properties between the years 2010 and 2012. The case of Prague is incorporated in this study as a singular representation of a general trend in the Czech Republic (Sevic, 2002). Analyses into some of the supporting structures of the current patterns of investment indicate that the property sector in the country is analogous in growth to some cases that have been shown on the international stage. As such, there are resident fears that the sector could witness some significant challenges and a possible bust if the government and industry players fail to put in place sufficient safeguard strategies to prevent such an eventuality. This study will attempt to examine all related factors, available evidence with the objective of exploring the impact of the boom on the value of property in Prague with particular reference to one case study (Sevic, 2002). The study will also seek to explore the possible impacts for the future. A boom in residential properties in the country has had multiple effects in the sector. The prevailing trends show that the boom has caused a significant increase in the value of properties in the country. Particularly, Prague and the areas around it have been cited as one of the areas where the boom in property development has occurred in the past decade. Some of the questions that arise include the matter of whether the prevailing trends are sustainable. Fears of a bust after the boom have continued to concern the players in the industry and the regulatory arms of the government. Past incidents have also exposed the vulnerability of the sector to government interventions and fraud (Megginson, 2005, p. 181). As a result, the industry is portrayed as one with mixed fortunes of challenges and opportunities. This reality makes it particularly difficult to determine with precision the nature of challenges and synergies that are likely to occur in the industry and the possible impacts on the value of properties in the affected areas. This study will attempt to explore in great detail all the related factors to these developments with a view of furnishing generalizations on the consequences of the property boom on the values of properties in and around Prague (Megginson, 2005). The study will also attempt to explain the possible scenarios for the future in the wake of these multiple forces. The findings of this research would provide resourceful insights to investors and developers on the trends and the landscape of the sector, which would be relied upon in the process of making informed decisions. The information will help the investors and developers to develop cautionary and strategic approaches to the industry. In effect, such approaches and strategies will help shield them from the kind of losses and risks that have been witnessed or experienced in the recent past. This study will prove useful to the relevant regulatory organs of the government in terms of expanding an understanding of the future scenarios of the sector. Some of the risks involved in the property sector are related to the inability of the government to develop appropriate regulatory or safeguard mechanisms that would protect the local investors and developers. The study will provide industry analysts with the necessary information that could be relied upon for professional analyses and predictions of trends in the residential property sector. Such information will help in the strengthening of the bulk of information that relates to the challenges and opportunities in the residential property sector. This study of real estate and property investment will find in this study important reference points that could be incorporated in their future research endeavours. Generally, the scope of this study shall be within Prague area and its immediate surroundings. Included in this scope are the residential properties located within the province and Prague and the municipalities that neighbour it. The scope of the study shall limit itself to the residential properties while systematically excluding other forms of properties that are not residential in nature. One of the limitations of this study included limited secondary data on the subject matter. The study did not benefit from sufficient local studies on the property boom in Prague and the effects on the value of properties and suggestions for the future. Equally, the study did not find hands-on experts in the field to supply the necessary information on the property market in the market. The dealers in the field did not demonstrate sufficient understanding of the intricacies and dynamics of the property sub-sector in the country. Recurrent themes in the literature on the growth of the residential properties sub-sector in the country have tended to revolve around the causative factors of the current boom, and the consequences of this boom on the other aspects of the economy. Dominant topics discussed under these kinds of literature include the synergies that have occasioned rapid growth in the development of the property market in the country and the sustainability of this growth. Alternative literature on the property sub-sector has focussed on the possibility of a bust in the sector and the attendant consequences. This kind of literature appears to lay significant emphasis for government regulatory mechanisms to pre-empt the possibility of a bust. There appears to be scant attention on matters of scenario and the possibility of low demand in the wake of the cited challenges. Studies on the property sector in the country seem to have projected some particular interest in Prague as the country’s investment hub. In the main Prague is considered as the nerve centre of the property boom in the country. However, experts have warned that deterrent activities such as fraud and unpredictable demolitions could slacken the pace of development in the sector. Demolitions have made the investors to assess the element of risk with experts warning of a reduction in investments. The natural result of such an eventuality, according to available literature, would be the reduction of prices of the properties. The implication of this development would be a drastic reversal of the supply and demand equation. Literature on the future landscape of investment into this sector has laid significant emphasis on the possibility of reduced interest by Czech Republic citizens in the Diaspora. Experts warn that Czech Republic citizens living in the Diaspora, who have been the main financiers of the property boom will begin to rethink of alternative areas other than real estate. A determined shift will burst the bubble of real estate growth. There have been large remittances from the West sometimes exceeding 100 billion shillings annually in accordance with available literature. Such money could be channelled to alternative investments thus orchestrating a drastic decline in the residential property sector. According to the opinion of experts, there is the urgent need for the government to control the obtaining trend of massive borrowing by developers. There are underlying fears of the bust of the industry leading to default in loan repayment by developers who borrowed heavily from the banks. Due to the discourses of globalization and liberalization of the markets, the financial market remains one of the most fluid and flexible sectors of the economy. The fluid nature of this sector will tend to determine the direction of the property market development. The residential property market will in effect be subject to the global realities, which occasionally affect the local financial sector. This would imply that the scenarios for the future will point at mixed fortunes with intervening seasons of regular increase and decrease in the value of the properties in and around Prague. Fluctuations in the bank lending rates are an important factor. Seasons of increased investment in the property sub-sector corresponded with low banking rates. But the reactionary measures by the Central Bank in the wake of runaway inflation and the weakening of the shilling have had significant impacts on the trade. The government raised interest rates thus pushing commercial banks to adjust their interest rates upwards to close to 25 percent. Like any other sector, the property market is influenced by macro-economic factors. Population growth is another factor that has affected the value of residential properties in Prague. Developers often interpret population growth in terms of an indicator of the market potential. In usual cases, high population growth rates often imply an increase in the purchasing power of the citizenry. As compared to other regions of the country, Prague is deemed as one of the safest destinations for residential property development. Structurally, the recent centralized systems meant that the city enjoyed the benefits of security and other logistical advantages than any other urban centre in the republic. For instance, few residential properties in Prague were affected by the post-election violence as compared to other towns. As a result, many investors from the restive parts of the country have migrated from other parts of the country to concentrate on Prague as the safest investment destinations. Rapid population growth has also featured as one of reasons behind the growth of the property. The factors of high birth rates, rural-urban migration, and the influx of migrants from neighbouring states in the city combine to explain the surge in the city’s population growth. This trend has encouraged continued investment into the sector as it appears lucrative and appealing to the developers and investors. Competing perspectives have contended that population increase in the city may not necessarily impact on the value of residential properties around the countries. Research has indicated that a majority of the Czech Republic citizen live below the poverty line. As such a significant percentage of the population will find the current mortgage rates too high that they cannot afford. Socio-economic realities will often affect the nature of development of the residential property development in any country. The rate of growth of the residential property market will be determined mostly by economic growth as reflected particularly through the enhancement of the purchasing power of the citizenry. Like any other sector of the economy, residential property market will be subject to other aspects of development that tie within the discourse of the economic development. However, the on-going processes of devolution are likely to have some significant impact on the current situation in the future. Speculations point to the possibility of reverse migrations back to the counties, which shall be empowered through increased devolution of resources. Investors may also spread out to the regions to take advantage of the synergies created within the discourse of devolution. The intervening period of speculation is likely to slump the development of the property sector. Naturally, changes in the trend of investment will most likely reverse the trend of growth that has been witnessed in the last decade. Investment and banking experts have warned that the unregulated growth of the property market could touch off adverse economic repercussions analogous to the United States financial crisis that followed the September 11 reduction in interest rates by Alan Greenspan, the Chairman of the Federal Reserve. According to analysts, the heavy borrowing followed the development that precipitated the financial crisis that followed. According to experts, there is need for the Central Bank to regulate the trends in borrowing for real estate investment. However, it remains imprecise about the exact nature of regulation that would shield the market from the adverse effects of the market. In the opinion of some industry players, the bust of the property market in Dubai may replay itself in Prague particularly due to the loose regulations of the sector. Before the bust, Dubai had severally been held up for praise as one of the fastest growing cities in the world. However, poor regulatory mechanisms in borrowing occasioned a near collapse of the sector with indications showing a growing lack of investment enthusiasm in the sector despite the government’s incentives and interventions, which include significant reductions in the mortgage prices. Trends show that Prague is the most favourite destination for residential property investors due to the logistical and infrastructural advantages of the capital (Peca, 2009). Industry analysts argue that the development will affect the industry both negatively and positively depending on the direction and influence of the market forces. At play are matters of demand and supply, competition between small-scale and large-scale investors, government regulations, and the cost of construction are dictated by the strength of the shilling against the dollar. A connection of these matters may spur or hinder the developments in the sector to a significant degree. The growth of infrastructure such as roads and information and communications systems has spurred growth in the residential properties market. For instance, the building of roads funded by the African Development Bank and the Czech Republic government is projected to bring some significant impact on the growth of the sector. Generally, the value of properties in regions where such infrastructural developments have been concentrated may have the impact of increasing the value of properties in these regions. Development experts have predicted that the value of residential properties increase significantly in the near future in response to the infrastructural advantages attached. This study incorporated multiple methods to analyze data. Data was collected by two main methods comprising of interviews and analysis of a single case. Basically, the analysis of the interview transcripts involved the use of codes. The information obtained from the interviews transcripts was coded into key words and phrases that related with the major themes of the study. These codes were then organized into tables that were arranged in accordance with the major theme. The themes of the study were developed from of the general opinions concerning the impact of the property boom on the value of properties in and around Prague. The major themes of the study were; fluctuating market, prospects of stability of value, a slump in the value of the properties, prospects of drastic climb of property values, uncertain future scenario. The information obtained from the respondents was matched to these themes in order to establish the patterns of associations. Conclusion Basing on the findings from the multiple sources incorporated into this study, the property sector in Prague has experienced significant growth in the recent past. Market speculations, the availability of loans at favourable interest rates, and loose regulations of the sector have been cited both in the findings and in the attendant literature as some of the driving factors of this growth. Other factors that have been cited include increased investments by Kenyans in the Diaspora and the rising nature of demand against the limited supply. On the negative side, fears of a slump are based on the fears of a financial crisis that might result from the inability of the developers to service their loans to reduction in the value of the properties as may be reflected through a fall in the revenues from the residential properties. The dynamic nature of the property market lends itself to various explanations, which include the fluid nature of economic systems and the influence of government policies and regulatory practices on the sector. It might be equally important to assess the development of the sector in line with the various connections that are to be found between the sector and the global economic realities. This view is consistent with expert opinions that have sought to link the processes of globalization and the liberalization of the market economies as some of the reasons behind a continued surge of property values in the country. It might be important to relate the on-going developments in the sector to the positive impacts that have been born out of the globalized economies. Analysts and market experts have contended that the property market in and around Prague faced mixed fortunes due to the enormous challenges and threats that continue to affect the sector from opposite directions. Some analysts have predicted periods of stability while others have argued that the industry faces a possible slump due to poor government policies and the frequent disruptions in the sector. Some of the recommendations that have been suggested include the drafting of special legislations that would guarantee some significant element of stability to the sector. Such legislations should include specific mechanisms on loans and interest rates in order to shield the country from the kind of crises that have been witnessed in places such as the United Arab Emirates and the United States. Works Cited Arner, D, W, 2007, Financial Stability, Economic Growth, and the Role of Law, Cambridge University Press, Cambridge. Florio, M 2011, Public Investment, Growth and Fiscal Constraints: Challenges for the Eu New Member States, Edward Elgar, New York. Haber, S, North, D & Weingast, B, 2007, Political Institutions and Financial Development, Stanford University Press, Stanford. Liebscher, K 2006, Financial Development, Integration And Stability: Evidence from Central, Eastern And South-Eastern Europe, Edward Elgar Publishing, New York. Megginson, W, L 2005, The Financial Economics of Privatization, Oxford University Press, Oxford. Peca, S, P 2009, Real Estate Development and Investment: A Comprehensive Approach, John Wiley & Sons, New York. Ranciere, R & Loayza, N 2005, Finacial Development, Financial Fragility, and Growth, International Monetary Fund, New York. Sevic, Z 2002, Banking Reforms in South-East Europe, Edward Elgar Publishing, New York. Read More