If you’re a longstanding commercial real estate investor, you understand the overall effect of macroeconomic factors on your business. Gross domestic product, unemployment, and the country’s stock index can adversely influence real estate prices. It directly impacts your business revenue if you buy and sell commercial property.
When the country’s economy is strong, unemployment is low, and the stock index is stable, your property will consistently show an upward growth year on year. If something happens that affects employment rates or the GDP, your property value could remain stagnant for years on end and even decline in value. Wouldn’t it be grand if we all had a magic glass ball to see the future? But, despite not having foreknowledge of all things, there are ways to minimize your risk and secure your company’s future.
In the following statistical graph from the Canadian Real Estate Association, you can see the impact of COVID-19 on real estate sales, with a significant drop in January 2020.
Knowledge about these macroeconomic factors is a vital part of managing your business. The more you understand the effect of macro factors that play a role in sudden changes in the market, the better you’re equipped to safeguard your business.
Today we’re going to discuss a few of the most prominent macro factors and how you could respond to them.
Growth Rate in Real Per Capita Consumption
It’s imperative to monitor the real GDP consumption growth rate and comprehend that it can also show a negative growth rate if the economy is taking a punch. If consumers are spending less, producers earn less and cut down on domestic production and distribution, leading to job-cuts and unemployment. When this happens, fewer people buy properties as they have to utilize more income on daily necessities and ‘hold on’ to their money in fear that they negatively affect their cash flow requirements.
To calculate the growth rate in real per capita consumption, you measure the country’s overall economic output divided by the actual number of citizens, and you adjust it for inflation. You can use this rate to determine the quality of living in various countries over set periods.
Real T-Bill Rate
Canadian Treasury Bills are short-term federal and provincial government bonds that reach maturity over 12 months. You can typically buy T-Bills in denominations of C$1,000, but in specific transactions, the maximum denomination may increase to C$5,000,000. The longer-term you specify to invest in T-Bills, the higher the interest rate will pay back to your investment.
Interest Rate Term Structures
The yield curve of your investment refers to the term structure of interest rates, and it shows the interest rates of similar quality bonds at various maturities. It reflects market participants’ expectations regarding future changes in interest rates and assesses the yield curve’s monetary policy conditions. It’s typically stated in the form of a term report that predicts various economic values expected at specific terms such as three months, two years, five years, ten years, or a thirty-year maturity yield curve.
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