September 6, 2011

About GDP and Real Estate

Let's say this right away: the value of real estate is not a part of GDP. That is because the entire value of real estate was not produced in just one year.
However, the Change in the value of real estate is a part of GDP - at least as far as new housing construction and services on exiting housing is concerned.
Which leads us to the following question: Suppose I bought a house in a town in Israel in 2003 (I did), and suppose the value of the house now, a mere eight years later, is three times what it was before, what does it mean?
To tell you the honest truth, I can ask the question - but I don't know the answer. What can possibly change in the same floors, and the same walls and the same ceiling that would make it worth three times as much in just eight years?
It's true that the train now gets not very far from my house, and the number of residents in the town has increased, but the house also got older.
It all boils down to this - the price of houses is determined by supply and demand, and thus supply and demand for houses have a very clear effect on GDP.
So I hope that the lesson from this example is clear - GDP is to a large degree determined by 'psychological' factors.
This means two things:
  • GDP is hard to predict
  • It is not clear what it measures in the first place.