When a home is purchased, there are direct and indirect benefits for the local economy. A lot of ancillary purchases are triggered beyond the initial payment on the home. It almost always involves remodelling and customizing the home to the new owner’s tastes and lifestyle needs. Add in new furnishings and household items as well as other service providers involved in the housing sector and the dollar value impact can be quite significant.
In a study done recently by the Illinois Association of REALTORS®, US $4,000 per house purchase was attributed to construction, for example, painters, electricians, plumbers and repair contractors. It is important to note any house sale creates these kind of expenditures from both the seller and the buyer.
The seller is obviously interested in giving their REALTOR® the best opportunity to maximize the value they receive at the time they sell their home. Whether on their own volition or from gaining valuable advice from a REALTOR® — they know exactly what steps can be taken to improve a home’s curb appeal and presentation so the homeowner can achieve a higher sale price — expenditures are made before the home is put on the MLS® market.
On the other hand, the buyer has his/her own idea of what they would like to do. Do not be surprised if they undo some of the work the previous owner had done because it is not in keeping with what they like. In one instance in Winnipeg a few years ago, a home was purchased for over $1 million and showed very well. The new owners were intent on a complete remodel of the home and literally spent hundreds of thousands of dollars more to remake it to suit them.
Continuing on with the estimated amounts highlighted in this 2010 Illinois study, another US $7,000 was spent on retail trade items such as furniture, appliances, housewares and fix-up items in hardware stores. They attributed nearly US $900 to moving expenses and over US $15,000 to services relating to the home sale and purchase, such as lender fees, homeowner’s insurance, commissions paid to real estate brokers, legal fees, property inspectors and other closing costs.
You then have to drill down further to understand and determine how these direct expenditures create what is called a multiplier effect on the economy.
What they did in the case of this Illinois study was to use input-output analysis to show how the money spent in these various industry sectors would then stimulate other spending in other industries. What is quite remarkable and what people do not realize is the power of this multiplier effect.
Based on the 111,319 sales transacted in the state in 2010, the Illinois Association of REALTORS® determined that total direct expenditures amounted to US $3.2 billion, while the indirect benefits worked out to US $4.7 billion. Total impact of all these house sales in Illinois was US $7.9 billion.
Let’s even take it one step further. What are the numbers of jobs relating to this US $7.9 billion impact and the wages and salary income generated for Illinois? It ends up being US $2.3 billion in wage and salary income and represents 85,677 jobs.
The Illinois study even broke down first-time buyers with non first-time buyers. The former accounted for 53 per cent of home purchases, so it becomes quite evident in states such as Illinois that if first-time buyers are absent from the market — be it for affordability issues or other reasons — it has a negatively effect on the economy.
The Canadian Real Estate Association (CREA) has done a similar analysis using Altus Group Economic Consulting to crunch their sales numbers . Altus concluded that a total of $49,625 Cdn in ancillary spending resulted from house sales between 2010 and 2012. It was also estimated that 176,420 jobs were created by the MLS® activity generated in these two years.
The annual spin-off benefits for Manitoba alone was $536 million Cdn. As a country, the amount is a staggering $22.5 billion Cdn. Many industries benefit from housing transactions. When you break it down, not surprisingly finance, insurance and real estate services account for the highest percentage at 23 per cent. Close to this sector, however, is professional services (includes public service jobs) at another 23 per cent. Trade is not far behind at 20 per cent, followed by other jobs at 16 per cent, construction at 13 per cent and manufacturing at five per cent.
So when you wake up in the morning and hear the CBC national reporter say stay tune for the new monthly MLS® market report from CREA, they understand that the numbers released by the association are a key metric to follow, owing to their importance to the overall health of the national economy.