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The Evolution of Real Estate in the Economy

Working paper #349
Dapeng Hu and Anthony Pennington-Cross

This paper examines economic indicators to show how the role of the real estate industry in the economy has evolved over time. This examination spans the early 1980s through 1999. Our key conclusion includes the followings.
1. In terms of economic flows real estate is as important a part of the economy as ever. About 11% of GDP each year is attributable to the real estate industry. Some parts of the industry, especially those finance and capital market related, have increased share in GDP, while others (services) have remained constant or even shrunk.
2. In a stock measure, household and corporation asset allocations have shown significantly lower shares for real estate. The strong performance of the stock market, growth in household wealth combined with a relatively low income elasticity of demand for housing, and changed corporate behavior appear to have contributed to this decline.
3. The values of real estate in debt and equity markets have increased substantially. Securitizations of mortgage and commercial mortgage have made real estate an increasingly important component in debt market. The prominence of real estate investment trusts (REITs) in the stock market has increased since 1985. However it remains a very small fraction of the overall equity market.

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