Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-39
ECONOMIC PROBLEMS OF REAL ESTATE MARKET AND ITS INFLUENCE
ON THE DEVELOPMENT OF BUSINESS ENVIRONMENT
Linda Kauskale1, Mg.oec, PhD student, Ineta Geipele2, prof., Dr. oec.
1, 2
Institute of Civil Engineering and Real Estate Economics, Faculty of Engineering Economics and
Management, Riga Technical University
Abstract. Interconnection between macroeconomic development and company’s management and entrepreneurship
in general is especially important nowadays, as external factors have a great influence. The aim of the research is to
analyse the key economic problems, special attention paying to business cycles and their importance for the
development of business environment and entrepreneurship in real estate market. Problems of economics, social
development and problems of business environment and management of the company are interconnected and are
analyzed in the integrated approach. A detailed analysis of scientific literature and research articles as well as historical
approach, induction, deduction and logical access methods have been used in the research. The results of the research
show a high level of interconnection between business environment and entrepreneurship at the real estate market.
Research defines key interrelation aspects and highlights importance of competitive business environment
development. The future research directions have been identified as well.
Key words: real estate market, economic problems, business environment, entrepreneurship, regional development
JEL code: E3; R1; R3; N1
Introduction
environment
Topicality of the research is determined by the
fact that economic problems are affecting the
development of the business environment and all
society in general. The aim of the research is to
analyze key economic problems, while paying
special attention to business cycles and their
importance for the development of business
environment and entrepreneurship in real estate
market, which is also an object of the research.
Economic problems in general and problems of
real estate market development have a great
influence on the development of society, and at
the same time, all these aspects have a great
importance in business environment development
as well. Tasks of the research are the following:
to
conduct
a
detailed
analysis
of
scientific
literature on economic development problems; to
and
has
an
impact
on
the
entrepreneurship in real estate market. The
paper employs a detailed analysis of the scientific
literature,
research
articles
and
international
experience on research problem. The research
induction, deduction, logical access and historical
approach methods have been used in order to
achieve the aim of the research. Integrated
approach
opportunity
of
conducted
of
wider
research
analysis
on
gives
an
research
question, emphasizes novelty of the research and
is
important
for
development
of
recommendations. One of the priorities of the
Europe
2020
strategy
is
a
sustainable
and
inclusive economic development, so the special
attention should be paid to its improvement and
resolution of the related problems (European
Commission, 2015).
determine key influences on the real estate
1. Socio-economic development problems
market
and business cycle
development
and
development
of
business environment; to analyze related social
aspects of researched question; to summarize
results
of
the
research
and
to
develop
recommendations for improvement of business
environment.
Hypothesis of the research is – the resolution
of economic problems in the existing economic
system is crucial for the development of business
Development of the society can be observed
every day as well as it is possible to identify the
areas and problems, which should be improved
and resolved on a daily basis. The development
history of the society includes several significant
stages, and each stage has its pros and cons. The
most significant directions of human development
over the past 500 years are presented in Table 1.
Corresponding author. Tel.: + 371 29963349; fax: + 371 67089034 E-mail address: [email protected]
39
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-40
Table 1
The most significant directions of human development over the past 500 years
Year
(approx.)
Direction of the Development
Typical Features of the Development
1600
Scientific revolution
Use of modern science and resources
1750
Enlightenment
Development, which is based on science and
intellectual awareness
1775
Industrial revolution, urbanization
Mass production of various goods; extensive
use of fossil fuels
1900
Socialism, democracy
Stronger civil society: development
opportunities for each
1920
Marxism and capitalism (in the East
and in the West)
New economic order
1950
Modernism
State and market, economic growth
1980
Neoliberal capitalism
Margaret Thatcher, Ronald Reagan,
globalization
2000
We are looking for a new direction of
development
Sustainable development
Source: Klavins and Zaloksnis, 2010, p.18
Development of society occurs cyclical. There
Mitchell (1946) criticized their own definition,
are several types of cycles, they differ in a
because the following question was raised by the
number of factors, such as duration, intensity.
definition “Does a large nation, such as the
The causes and consequences of the cycles are
United States, have a single set of business
also
cycles, or do the several geographical regions
different.
The
following
cycles
are
particularly important for the analysis of the
economic problems:
•
economic
cycles,
have substantially different cyclical movements?”
David Begg (2013) defines the business cycle
which
are
also
called
as “a short-term fluctuation of output around its
trend path”. He considers cycles are likely when
business cycles or trade cycles;
•
cycles of financial and capital markets;
•
real estate market cycles etc.
we recognize the limits imposed by supply and
demand. Christina D. Romer (2008) points that
the term “business cycle” is misleading, because
Arthur F. Burns and Wesley C. Mitchell (1946)
the “cycle” seems to have some regularity in the
define business cycles as “a type of fluctuation
timing and duration of expansion and recessions
found in the aggregate economic activity of
in economic activity but the most economists
nations
in
have another understanding: there have been
of
three recessions in the USA over the time period
expansions occurring at about the same time in
between 1973 and 1982 but 1982 was followed
many economic activities, followed by similarly
by eight years of uninterrupted expansion. Many
general recessions, contractions, and revivals
modern economists prefer using the term “short-
which merge into the expansion phase of the
run economic fluctuations” rather than “business
next cycle; this sequence of changes is recurrent
cycle” in order to describe the changes in
but not periodic; in duration business cycles vary
economic activity.
business
that
organize
enterprises:
their
a
work
cycle
mainly
consists
from more than one year to ten or twelve years;
Irving Fisher (1933) emphasized that co-
they are not divisible into shorter cycles of similar
existing cycles could also aggravate or neutralize
character with amplitudes approximating their
each other. Ludwig von Mises (1949) defined that
own”. However, Arthur F. Burns and Wesley C.
“the wavelike movement affecting the economic
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40
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
system, the recurrence of periods of boom which
•
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-41
a more stable housing market;
are followed by periods of depression, is the
•
location of housing supply which supports
unavoidable outcome of the attempts, repeated
again and again, to lower the gross market rate
of interest by means of credit expansion”. Ludwig
von Mises (1949) also specified, that the one was
free to demand an improvement in the quality
and increase in the quantity of products but he
mentioned
that
if
somebody
applied
this
formulation to various phases of the cyclical
fluctuations of business activities, he should have
called the boom retrogression and the depression
should have been called a progress, because the
boom
produced
impoverishment
and
moral
ravages, and, the more optimistic people were
under the illusory prosperity of the boom.
real estate market, because business cycle is
affecting the real estate market and in some
cases vice versa. Investment Property Databank
(1999) notes that “property cycles are recurrent
but irregular fluctuations on the rate of all
property total return, which are also apparent in
many other indicators of property activity but
with varying leads and lags against the allproperty cycle. Common features of three UK
crashes:
1973-4;
1989-91;
2007-9
(Jowsey, 2011):
•
•
•
•
an adequate supply of publicly funded housing
for those who need it.
Milton Friedman (1962) in his work Capitalism
and Freedom emphasized that many government
programmes were not coming into effect until
passing of the recession, more often they were
affecting total expenditures and were tending to
exacerbate the succeeding expansion instead of
mitigation of recession. He mentioned that there
was often a lack of information in fiscal and
monetary policy in order to be able to use
changes in taxation or expenditures as sensitive
stabilizing mechanism. Macroprudential policy is
These ideas have a great influence also on the
property
patterns of economic development;
also very important nowadays, and its aim is the
increase of the resilience of the financial system
to shocks and moderation of the financial cycle
(Committee on the Global Financial System,
2010). Antony Giddens (1984) believes that
people in social life are straining after the certain
stability, i.e. they have a need for security and
confidence. Such economic indicator as income
distribution
is
also
very
important
for
the
development of society. Simon Kuznets (1955) in
his work Economic growth and income inequality
believed that economic growth in poor countries
over-optimistic developments supported by
increased the income difference between rich and
borrowed funds;
poor people. Simon Kuznets (1930) also analyzed
lenders borrowed short and lent long without
the cyclical nature of production outcomes and
adequate security;
prices in time period of fifteen to twenty years,
lenders were exposed to unforeseen shocks:
and such trade cycles were often referred to
a.
b.
c.
oil price rise in 1973;
“Kuznets cycles”. Vilfredo Pareto (1961) was
inflation and subsequent interest rate
famous for his elite theory - he claimed that
rise in 1989;
people
US sub-prime crisis in 2007.
were
not
equal
either
physically
or
intellectually as well as from the point of view of
The government plays a key role in the real
estate market regulation. Kate Barker (2004) in
The Barker Review for UK defined the following
the morality, so he believed that inequality was
completely natural, obvious and was a real
phenomenon. It meant that people with higher
indicators were composing elite and each of the
objectives:
spheres of human activity had its own specific
•
to
achieve
improvements
affordability in the market sector;
in
housing
elite. According to Vilfredo Pareto (1961), elite
was
divided
Corresponding author. Tel.: + 371 29963349; fax: + 371 67089034 E-mail address: [email protected]
into
governmental
and
non-
41
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
governmental political elites, and he stressed
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-42
Human inequality is related to income
that the exchange between the elite and the rest
inequality, which is one of the most important
of the society was continuously taking place, and
factors, defining the accessibility of housing for
such circulation was necessary in order to ensure
different social groups. The countries with the
social balance.
most
inaccessible
housing
are
presented
in
Figure 1.
Source: Demographia, 2015, p.13
Fig.1. National Housing Affordability in 2014 according to data from 378 markets
(Median Multiple - Median House Price Divided by Median Household Income)
Housing
affordability
is
a
2. Business environment and real estate
socio-economic
market development problems
aspect, which is affecting the life quality of
society and also has high economic meaning.
The main areas where increased levels of
John Kenneth Galbraith (1958) was convinced
entrepreneurial
that the economic imbalances were resulting also
significantly
from the consumer society, because too many
to
activity
specific
can
policy
contribute
outcomes
are
(OECD, 2004):
resources were driven to production of goods but
not sufficient resources are driven to the public
1) job creation;
needs and
2) economic
infrastructure.
There
are
several
growth,
productivity
problems both in the economy and in the real
improvement, and innovation;
estate market, and the development fluctuations
3) poverty alleviation and social opportunities.
make business environment uncertain, so it is
It is important to note that the company is
necessary to understand how the entrepreneurs
affected by a number of micro and macro factors.
and market participants can reduce the impact of
The competitiveness-oriented management micro
the negative factors.
and macro factors are presented in Figure 2.
Mutual link
Macroenvironment
Microenvironment
P-
Political factors
E-
Economic indicators
S-
Social, cultural demographic factors
T-
Technology, science etc.
E-
Ecological
L-
Legal
The competitivenessoriented management
micro- and
macroenvironment
Enterprise
Product
Consumers
Mediators
Competitors et al.
Source: Fedotova, 2012. Figure updated by the authors
Fig.2. The competitiveness-oriented management micro- and macro-environment
All
influencing
micro-
and
macro-
environmental factors have a significant impact
on business environment in general as well as
the
operation
Corresponding author. Tel.: + 371 29963349; fax: + 371 67089034 E-mail address: [email protected]
and
competitiveness
of
any
42
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
company. Nowadays, external factors become
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-43
the significance of the mortgage system in the
more
and
for
strategic
country and the availability of credits for real
of
business
estate purchase on the local market. At the same
environment. The previous research (Kauskale
time, the importance of influence of external and
and Geipele, 2015) has shown that, for example,
internal
in Latvia, in the period from 2004 to 2008, the
highlights
number
management
of
more
important
and
development
mortgages
secured
in
the
factors
on
the
the Competing
entrepreneurship
Values Framework.
Land
Influence of macroeconomic factors is especially
Registry in Riga was bigger than the registered
important for open systems model, however, this
purchase agreements, which was one of the
factor influences all entrepreneurs. Competing
market overheat signals. After the crisis period,
values framework of Quinn is shown in Figure 3.
the situation has changed but this fact highlights
Source: Quinn, 1988
Fig.3. Competing values framework of Quinn
One of the studies reveals that environmental
•
access to skills;
competitiveness positively moderates the link
•
access to capital;
between
process
•
access to opportunities;
innovation but negatively moderates link between
•
influencing the risk-reward trade-off.
business
performance
and
business performance and product innovation
(Prajogo, 2016). Business environment in the
country can also influence volumes of attracted
foreign direct investments. For example, the
taxation on FDI is quantitatively less relevant
than the impact of other policies, as it makes a
location attractive to international investors in
terms of openness, regulatory hurdles and labour
costs (Hajkova, Nicoletti, Vartia and Kwang-Yeol,
2006). OECD (2005) defined four criteria of
The
correlation
of
entrepreneurial
performance and entrepreneurial education is
one of the highest in OECD member countries
(2005). Formal and non-formal education of
citizens is very important for the development of
each region. Formal and non-formal education of
citizens of Latvia is presented in Figure 4. It is a
positive tendency that the number of people who
got education has increased in most Latvian
regions in the period from 2004 to 2011.
business environment:
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43
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-44
Source: authors’ construction based on the Central Statistical Bureau of Latvia
Fig.4. Formal and non-formal education in Latvia, thou. persons
El-hadj Bah and Lei Fang (2015) analyzed
electricity, registering property, getting credit,
business environment in Sub-Saharan Africa by
protecting
the
trading
following
criteria
–
corruption,
crime,
minority
across
investors,
borders,
paying
enforcing
taxes,
contracts,
infrastructure, regulation and access to finance
resolving insolvency (Doing Business, 2015b).
indicators. Economy regulatory environment in
Ease of doing business in general also shows a
some countries may be more business friendly
level of attractiveness of business environment.
than in others, for instance, in such areas:
Country ranking of Doing business (2015a) is
starting a business, ease of doing business,
shown in Table 2.
dealing
with
construction
permits,
getting
Table 2
Ranking of countries*
Ease of Doing Business
Rank
Starting a
Business
Dealing with
Construction Permits
Singapore
1
10
1
New Zealand
2
1
3
Denmark
3
29
5
Korea, Rep.
4
23
28
Hong Kong SAR,
China
5
4
7
United Kingdom
6
17
23
United States *
7
49
33
Sweden
8
16
19
Norway
9
24
26
Finland
10
33
27
Economy
*10 countries were chosen in accordance with Doing Business ranking
Source: authors`construction based on the Doing Business rankings, 2015
Each
country
has
advantage
and
strong
External
factors
and
its
and
global
own
competitive
weaker
points.
challenges
real estate market. For example, State Regional
Development Agency (2015) focuses attention on
are
economic, social and environmental spheres,
affecting entrepreneurship in general as well as
and, in the opinion of the authors, influences the
the construction business and the development of
development of the business environment.
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44
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-45
Table 3
Business environment influencing factors
Business environment
Economic sphere
Social sphere
Investments (private
non-financial)
Environmental sphere
Demography
Economic activity
(economic performance
of the company, number
of companies,
establishment,
liquidation)
Education, qualification, creative
Infrastructure (physical
indicators)
Social security
Workplaces
Expenses of municipalities for
education, social and cultural activities
potential
Territory, its structure
Employment, unemployment
Resources
Health (incl. social) of the inhabitants
Pollution, environmental
quality
Security and public order
Water supply, sewerage
and waste management
(physical indicators)
Income, consumption, housing sector
Municipal budget
revenues
Source: authors’ construction based on the State Regional Development Agency, 2015
For economic growth calculations, there are
attempts
economic
to
analyse
diversity,
characteristics
international
such
trade,
as
real
income of the population, the level of tax burden,
the
volume
Purchasing power is affecting the demand in
the real estate market but the recession in the
real estate market can negatively affect GDP. The
development,
indicators
volumes of foreign direct real estate investments
reflecting income conditions of the population,
can increase GDP. The most important difficulty
level
is the lack of information that is affecting the
can
poverty,
find
and
and real estate market is shown in Figure 6.
economic
one
savings,
between government policies, national economy
infrastructure. In the group of indicators of social
of
of
estate market, and vice versa. Interconnection
social
income
differentiation,
employment and unemployment, minimum wage,
decision-making
extent of housework and volunteer activities, life
participants. Globally, there is a lot of information
expectancy, infant mortality, health status of the
but the effect of external factors is crucial. The
population, incidence of obesity, extent of crime,
following factors may have an impact on the
abuse and other factors (Zuzana Hajduova et al.,
forecasts – political changes, sociological and
2014). There are many problems to be resolved
cultural changes, economic influences, climate
in the development of the national economy and
change, technological issues (Harris, McCaffer
of the real estate market. The main problems are
and Edum-Fotwe, 2013). Structure of national
grouped and shown in Table 4. Resolution of
economy and real estate market is complicated
these
and affects the business environment as well as
problems
can
positively
influence
the
development of the business environment.
process
of
the
market
such aspect of entrepreneurship as the company
Social and economic problems influence real
estate market. Interconnection between national
management,
so
all
mentioned
aspects
are
interconnected.
economy, real estate market and construction
industry is shown in Figure 5.
Economy,
industry
development
and
competitiveness of enterprises are interrelated
indicators (Denisovs and Judrupa, 2008). At the
same time, economic growth is affecting the real
Corresponding author. Tel.: + 371 29963349; fax: + 371 67089034 E-mail address: [email protected]
45
Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-46
Table 4
National economy development, real estate market and construction problems
National economy development
problems
- Cyclical nature of development
economic development fluctuations,
demand and supply shocks,
difficulties in forecasting.
Development and price stability are
required, but it is not always
possible to achieve.
- Economic growth in terms of GDP
growth (which results in the
increase in the number of produced
goods and services)
Construction
problems
Real Estate Market problems
- The cyclical development nature of
the real estate market - imbalance.
need to achieve its sustainable
development
- Sensitivity of the real estate market
and its participants to external
factors and economic development
- Real estate market overheat
- Investment returns
- Real estate market recession,
stagnation
- Availability of
financing
- Financial market development,
availability of mortgage loans
- Construction costs
- Employment support, creation and
stimulation of new jobs, labour
market development, achievement
of full employment
- Insufficient information
- Unequal income distribution and
need of achievement of effective
use of resources
- Behaviour of the real estate market
participants in the market, shortterm thinking
- Optimal fiscal, monetary and
macroprudential policy
development and implementation
- Insufficient demand
- Successful regional policy
- Impact of international factors
- Net export, more value-added
business, positive trade balance
- Significant impact
of external factors economic
development and
real estate market
impact
- Real estate return rates
- Real estate market impact on the
national economy
- Housing affordability problems, that
is affected by:
- Purchasing power, salaries
- Availability of mortgage
- -Environmental
aspects, such as
environmental
protection,
ecological
construction
- Construction quality
- Compliance with
deadlines
- -Company`s
management
problems
- - Legal and other
PESTEL factors
- Real estate purchase price
- Real estate rental rates
- Other PESTEL factors
Source: authors’ construction
National economy -> business environment -> construction and real estate entrepreneurship
Source: authors’ construction
Fig.5. Interconnection between the national economy, business environment,
construction and real estate entrepreneurship
Source: authors’ construction
Fig.6. Interconnection between government policies, national economy
development and real estate market
Conclusions, proposals, recommendations
1) National economy and real estate market
factors
are
are of high social importance and face a
entrepreneurship,
variety of problems and situations that should
development of the country.
be resolved and improved. The results of the
2) Level
research show that the following analyzed
environment
of
Corresponding author. Tel.: + 371 29963349; fax: + 371 67089034 E-mail address: [email protected]
interrelated:
macroeconomics,
attractiveness
is
cycles,
affecting
of
the
overall
business
economic
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Proceedings of the 2016 International Conference “ECONOMIC SCIENCE FOR RURAL DEVELOPMENT” No 43
development of the country as well as social
Jelgava, LLU ESAF, 21-22 April 2016, pp. 39-47
3) Reducing negative impacts of real estate
and environmental aspects. Human inequality
cycles
results in income inequality, which is one of
general. Economic fluctuations make business
the most important factors for availability of
environment unspecified, so it is necessary to
housing for different social groups. Housing
reduce the impact of the negative factors. This
affordability is a socio-economic aspect that
aspect
influences the life quality of the society and is
environment development within real estate
also
the
market and business environment between
improvement of economic situation allows
different regions are planned to be future
increasing the level of prosperity and the
research directions.
economically
important,
so
can
as
be
well
favourable
as
for
analysis
society
of
in
business
quality of life.
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