Master Class: Building Permits

2019-2-20 13:24 | By : MEX Analyst Team

Changes in forex prices can be triggered by a myriad of factors, but deep into its nature, the essence is the demand and supply in the market. What determines the demand and supply of a currency? The outlook for that country's economy. The detailed explanation is mentioned in the last Master Class: Michigan Consumer Confidence Index (UMCSI). I strongly recommend you check it out if you have not done so.

Last time I talked about retail consumers' predictions about the future economy. This article will be discussed from the perspective of real estate developers. A building permit refers to the number of construction projects approved by the government every month. Although the share of real estate in GDP is less than retail consumption, the economic implications of building permits are far from its direct influence on GDP.

Implications

Firstly, it conveys the views of real estate developers on the future economy. Imagine that regardless of the cost of the actual construction, the cost of a paper license is already expensive, and real estate developers will determine the number of licenses they would like to apply based on detailed analysis and statistics. The analysis results obtained by the real estate developers are professional, so if their economic outlook stays positive, the number of building permits will rise, and vice versa.

Secondly, the number of constructions reflects the demand for housing by retail consumers. Real estate developers have to study the market's demand before making a investment decision, so as to ensure that the real estate project can be sold smoothly after completion. If the number of building permits is low, we can treat it as the signal that retail consumers are now having a low demand for real estate as well as the low consumer confidence level, which will hit the retail industry in the country and will in turn slow down economic development.

Thirdly, it reflects the health of the overall economy. From the perspective of developers, if the economy is growing steadily, which mean they can get loans from banks or other investors easily, they will tend to apply for more building permits. At the same time, from the perspective of consumers, it is easier to obtain a mortgage, so the demand for real estates will rise, and developers will certainly seize the opportunity to increase their investment. In a nutshell, a high building permit represents a good financing and investment atmosphere, and vice versa. This is an important measure on the health of an economy.

How to use?

We can observe that the Building Permits and GDP follow the same trend. Although the building permits will occasionally be adjusted back, the overall trend is still rising. At the same time, the gross national product showed a steady upward trend.

Therefore, in actual use, investors can use the number of building permits to predict the future economic trend. Many professional investors like to use construction permits to identify future economic risks. When the trend of building permits changes, investors should step up their analysis of the potential risks of the current economy, to seize the opportunity and prepare for the next wave of volatility.

In the second chart, the building permits trend line is also directly related to the foreign exchange price. In the view of middle to long term forex investment, when the number of building permits is on the rise, it can be regarded as the driving force to the currency, and vice versa. However, it should be cautiously used, because the change in foreign exchange prices is not caused by a single factor. Investors should look at the overall situation and should not rely solely on a single indicator.

The above are the content today about Building Permits. You can download relevant data and try to make your own analysis chart! See you next time!