Tuesday, January 23, 2007
Outsourcing And Domestic Demand: The Case For Real Estate Capital Growth
A paper spotlighting how outsourcing benefits domestic real estate growth.
It is an undisputed fact that market economies, in Capitalism, are moved by the supply and demand for goods and services. Specifically as it relates to the Real Estate sector, the basis for the real estate market is the demand by households, businesses, governments and institutions for space and shelter to conduct activities. And moreover, since according to the National Association of Realtors the aggregate size of residential real estate markets in the United States measured by sales volume accounted for almost USD 57 billions in 2005 alone, the impact of households' demand for residential real estate products is huge.
When people acquire income they tend to invest it, and the more people that acquire income the more people that tend to invest it. Therefore, there is a correlation between capital and employment in real estate or, if you will, between income and labour. An increase in levels of consumption sets forth an increase in prices caused by a corresponding increase in demand, in itself generated by a commensurate increase in the income-employment factor.
It follows, therefore, that growth is derived by the equilibrium of capital and investment with labour and employment. And since, furthermore, production is in direct function of consumers spending which increases as unemployment falls, it follows that capital accumulation increases as employment rises and capital accumulation decreases as employment falls. Which fact, therefore, brings up to light the importance of the conditions of domestic job markets for real estate. All the more so at a time when - due to an ever more efficient process of economic globalization - we are witnessing a constant migration of jobs from North America to emerging economies abroad.
Globalization and outsourcing were, in fact, the focus of the annual symposium held by the Federal Reserve Bank in Kansas City. The topic being floored and examined by the top minds of the economic world was how the rise of China, India and other countries is reshaping employment and wages within the North American economy.
It is commonly believed that wages of workers in rich countries are being depressed by the shift of jobs to low-wage countries, but the debate undertaken at the symposium has offered a much rosier view, with economists arguing that off-shoring can actually increase the wages of domestic workers. The general feeling was that outsourcing boosts firms' productivity and profits, thereby enabling them to expand and, consequently, to take on more workers at home to perform jobs that cannot be easily moved abroad. In essence a line is being drawn between low-paying, unskilled jobs that can be transferred to emerging economies like those of China, India and, to a lesser extent, Russia vis-à-vis higher-paying, skilled jobs that remain in North America.
Clearly, whereas low-paying, unskilled jobs have a minimal to zero effect on the consumption of domestic real estate products, the scenario changes drastically with higher-paying jobs.
Outsourcing and jobs migration is a topic that has just as many political connotations as it has economic reverberations. Critics of outsourcing are quick to point out that between 1997 through 2004 the streamlining of companies through off-shoring was not enough to create sufficient higher-paying jobs at home to offset the outflow of low-paying jobs abroad. And that evidence does exist, furthermore, to the extent that in America, the Euro Zone and Japan total wages have actually fallen, in real terms, to their lowest shares of national income whereas the share of corporate profits has surged. An obvious indication that many ‘leaner' firms have opted for retaining their earnings as opposed to re-investing them in the domestic work pool.
Specifically because of this, Prof. Ben Bernanke, the Chairman of the Federal Reserve System, has argued at the symposium that the scale and pace of globalization is unprecedented and that the overall gains will be huge. But he has also warned that there is a risk of social and political opposition as some workers lose their jobs. The Chairman has urged policymakers, therefore, to ensure that the benefits of global integration are sufficiently widely shared through the echelons of the economy, so as to maintain support for free trade and enhance the democratization of wealth.
Real Estate stands to gain the most by a more evenly shared distribution of wealth in North America, both from the standpoint of increased demand and of increased inventory production and supply, for when people feel rich they spend - a psychological effect known in Economics as "The Wealth Effect". Despite the near-term moderation in the number of existing home sales, the housing market can all but continue to benefit from expected positive long-term economic fundamentals including expansion of gross domestic product generated by job creation and investments, coupled by a monetary policy of continued moderate interest rates.
Real Estate Chronicle