A country’s economy flourishes under a healthy political environment and the opposite will happen in case of political turmoil and instability. Like many other businesses, the real estate market is also heavily affected by the changing dynamics of a country’s political scenario.
The politics in Pakistan has undergone umpteen twists and turns in the past few months which has influenced real estate and other businesses both directly and indirectly. According to the World Bank, 60 to 70% of a country’s wealth is stored in real estate assets. As an estimate, Pakistan’s real estate industry is worth 300 to 400 billion dollars. This means that if the real estate industry weakens, the economy of Pakistan would certainly be affected.
The recent political events in Pakistan, amidst the pandemic of Covid 19, have deeply affected the economy including the real estate sector which necessitated the analysis for our investors and readers.
This article will help you understand how the political instability in a country can shape the future of the real estate market and investors.
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Why does political instability promote fear in the market?
What is fear in the market? Fear is the lack of confidence by investors, developers, and other market participants including realtors due to uncertainty of the future. In a state of low confidence or high uncertainty, owners would try to sell their properties while investors or buyers would be cautious while purchasing. This often results in lowering market prices of properties.
So, how is political instability related to fear or confidence in the market? Let’s find out the possible answers to this question!
Social Behavior and Lack of Investors’ Confidence
Whenever there’s a political instability, it affects social behavior and shifts the public’s psyche at large. Chaos would cause people to think that the market would become stagnant unless the situation stabilizes.
Owners fear that their properties might lose value, and hence, would try to sell in panic. On the contrary, buyers or investors will refrain from investing in the fear of lowering prices. However, it is advised to HOLD rather than make impulsive decisions. The market always corrects itself in its due time!
Therefore, investors lose confidence in the real estate market due to the prevailing uncertainty and withhold making new investments or even want to pull out their money from the projects that seem most uncertain.
Change in Regulatory system
Firstly, the new political system takes time to settle in, and thus legal processes slow down. The real estate developers have to wait for the legal processes (such as obtaining NOC) to proceed further. This sometimes delays the development work, resulting in a hindrance to the growth of the market.
Secondly, the laws, regulations and taxes on real estate properties and property valuation are prone to change which may encourage or discourage investors from actively investing, thus causing a rise or decline in the growth graph.
This puts the investors in a state of fear that the rise or reduction in taxes may affect their profitability directly. The new policy is devised in the wake of the socio-cultural climate of the country and the world. Keeping tabs on current affairs can help you predict the actions of policymakers.
Change in Priorities by the new government
A shift in the dimension of focus may as well delay things. Such as some governments may prioritize infrastructure while others may prioritize healthcare and education. If the investors believe they are not getting enough incentives, the market will see few to no new investments and the chances for the real estate market to grow will be scarce.
Lesser Demand, Higher Supply Cause Lowering Prices
When the uncertainty prevails, people avoid buying real estate products and often sell out their existing properties thinking that they might gradually lose value if the political situation is not sorted out soon.
Keeping a cheap property would seem foolish to most investors than selling it now and getting some handsome return while the market is still alive. Resultantly, the market has a plethora of products and no buyers to buy. Thus, a situation of more supply versus less demand occurs and causes a decreasing price trend.
Decreased Prices Provide New Investment Opportunity
When demand is tragically low and there is plenty of supply, the market prices would automatically go down. Anticipating this situation, many investors and buyers stop looking for investment opportunities.
However, a handful of investors take the risk and take advantage of this situation by investing in the properties at cheap prices. These investors are willing to wait for the prices to rise when the political stability has regained.
All these factors discussed in this post account for the stagnation and increased riskiness in the real estate market. Pakistan’s real estate market is very likely to experience a similar trend due to the ongoing political situation and impending elections.
However, Pakistan is not alone in this predicament. Due to the COVID-19 pandemic, the global economy is now going towards a recession phase. It is still not a hopeless situation, as the economy hasn’t taken the path toward decline yet and the recession means there is still room for growth.
Most importantly, the last thing that the market should do is panic! Panic causes impulse decisions driven by emotions which only worsens the situation.
The market always corrects itself after such interventions in its due time. Just stay calm and wait!