PESTEL analysis of the real estate industry
This is a detailed PESTEL analysis of the real estate industry which should help buyers and sellers make informed property buying decisions. There is no doubt that the real estate is one of the most dynamic, fast-paced, and competitive industries in the world today. Therefore, buying, selling, and managing properties require a combination of skills and expertise. In addition, the changing market, new laws and regulations, and the latest technology are all contributing to the volatility of the industry. As a result, there is a lot of uncertainty for both sellers and buyers.
Political forces that influence the real estate industry
Government policies and regulations can change the real estate market and drive demand and supply. For example, the governments in many countries have been encouraging people to save more and invest in property.
In the UK, Margaret Thatcher’s government passed the Housing Act 1980 to allow five million council house tenants in England and Wales to buy their house from their local authority with a massive discount with the ‘Right to Buy’ scheme.
Similarly, the government of Boris Johnson is pondering to provide the tenants of housing associations with right-to-buy which may enable millions to buy their properties with massive discounts (Allegretti, 2022). However, the idea has been criticised by some politicians and housing experts who opine that such a scheme will not resolve the housing crisis in the UK.
Political stability and instability also impact on the housing market. Investors are encouraged to buy more when a country has political stability. Conversely, there may be less demand for properties during political instabilities, particularly during wars which often damage many buildings.
Economic forces that influence the real estate industry
Economic environment is the next component of this PESTEL analysis of the real estate industry. Factors such as interest rates and inflation influence the real estate market and can make it more or less attractive to investors.
One of the most important factors driving the real estate industry is demand. This is a function of both current and future demand. Current demand is the result of factors like population growth and changes in demographics, affordability, and the level of economic growth. These, in turn, are influenced by interest rates, government policies, and the level of financial security.
Another important factor affecting the industry is supply. This is the result of factors like land availability, and development policies of both public and private organisations. In turn, these factors are influenced by government policies, economic conditions, and the level of financial security.
The real estate market is characterized by a high level of competition between real estate agents, both on an individual and a collective level. This competition can drive up the price of properties as the market is driven by supply and demand.
Many experts (cited in Campisi and Witkowski, 2022) forecast that the housing market in the USA are likely to remain strong in coming years for many reasons. Firstly, the supply of new homes is low resulting in more demands. Secondly, borrowers today are less likely to default on their mortgages like before. Finally, millions of youngsters are exploring avenues to enter the housing market.
Certainly, the housing market is closely linked to consumer spending. When house prices go up, confidence of buyers goes up as well. With increased confidence, they are willing to buy more properties. Conversely, when house prices take a downturn, confidence of the buyers declines as well (Bank of England, 2022).
Social forces that influence the real estate industry
Social environment is a key element in this PESTEL analysis of the real estate industry. There are many factors to consider here. For instance, consumer behaviour drives the real estate market. This market is shaped by the way people want to live, the types of properties they want to buy, and their economic and financial situations.
Population growth is also a major factor shaping the real estate demand and supply. Similarly, education levels play an important role in shaping consumer behaviour and spending patterns. This has a direct impact on real estate demand and supply.
The motivation behind buying a property is different for every customer. The real estate market is very competitive and buyers compete with one another for properties, both in price and other factors such as location and amenities. Therefore, real estate sellers are always looking at ways to differentiate themselves in order to attract and maintain a customer base.
Population size also influences the housing market in a country. China has the most valuable residential market and accounts for 30% of total global residential value. Its total population is over 1.4 billion. The USA accounts 11% of world residential value (Tostevin, 2021).
Technological forces that influence the real estate industry
As the real estate industry becomes more reliant on technology, the impact of technology on it becomes more visible. The use of Big Data in real estate has led to innovations like artificial intelligence, and virtual reality. With real estate technology, the process of buying or selling a property can be completely automated. This has led to increased efficiency and reduced costs.
With rising consumer expectations and emerging technologies, real estate is being seen as a key component of a ‘Smart City’. According to the European Commission (2022) a smart city is a place where traditional networks and services are made more efficient with the use of digital solutions for the benefit of its inhabitants and businesses. As real estate is a key component of a ‘Smart City’, it also plays a key role in the creation of ‘Smart Cities’.
Augmented Reality is one of the most exciting real estate technologies today. It has been around for a while but is finally seeing mass adoption in the real estate sector.
Augmented Reality is a technology that allows users to experience a property virtually before buying. This allows them to see if it suits their needs and lifestyle without actually buying the property.
Environmental forces that influence the real estate industry
Energy usage is one of the largest environmental impacts of the real estate sector. It is a result of factors like building new properties, managing existing properties, and the use of gas and electricity appliances. Likewise, real estate has a significant carbon footprint. This contributes to global warming and environmental degradation.
Developing real estate sometimes results in closing down outdoor space where children and adults can play and perform leisure activities. In addition, more people living in urbanized areas leads to water waste, food waste, noise pollution, and air pollution. Therefore, both governments and property developers need to explore avenues to reduce the impact of housing industry on the environment.
Legal forces that influence the real estate industry
Legal environment is the last part of discussion in this PESTEL analysis of the real estate industry. Government legislation plays an important role in shaping the real estate market. Laws can be passed to protect the environment, allow new technologies to be developed, or govern real estate licensing. These laws and regulations can drive up the cost of real estate as well. It is worth noting that different countries have different property ownership laws which may impact on the purchasing decisions of property buyers.
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Last update: 09 May 2022
Allergetti, A. (2022) Boris Johnson pondering right to buy for housing association tenants, available at: https://www.theguardian.com/society/2022/may/02/boris-johnson-pondering-right-to-buy-for-housing-association-tenants (accessed 09 May 2022)
Bank of England (2022) Why is the housing market important to the economy? Available at: https://www.bankofengland.co.uk/knowledgebank/how-does-the-housing-market-affect-the-economy (accessed 08 May 2022)
Campisi, N. and Witkowski, R. (2022) Will the Housing Market crash? Experts give 5-year predictions, available at: https://www.forbes.com/advisor/mortgages/will-housing-market-crash/ (accessed 09 May 2022)
European Commission (2022) Smart cities, available at: https://ec.europa.eu/info/eu-regional-and-urban-development/topics/cities-and-urban-development/city-initiatives/smart-cities_en (accessed 09 May 2022)
Tostevin, P. (2021) The total value of global real estate, available at: https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate.html (06May 2022)
Author: Joe David
Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.