Instruction: Task: Boom – Bust Nature of Construction Industry. The boom and bust nature of economics is defined as a situation whereby there is continuous and random instances of expansion and contraction within a certain specific aspect of a facet of the economy. This is such that the economy expands rapidly during one period, and subsequently leads to increase in development and the creation of jobs. The overall effect is that investors gain much during this period, and there are improved returns. On the other hand, the boom is followed by a period of bust during which the economy shrinks rapidly, leading to significant loss of both jobs and savings (Finkel 67). This is generally caused by the way that central banks manage the provision of credit through interest rates. While boom is characterised by low interest rates that facilitate increased credit and investment, bust is the period when the economy tries to maintain a state of equilibrium by cutting out the overinvestment that results from reduced demand. Different industries react differently to the boom and bust nature. As such, the construction industry has its own definitive characteristics that guide its boom and bust nature.
During boost in the construction industry, prices of residential and other forms of constructive units rise significantly, due to the gains realized in the financial and income sectors. Additionally, the interest rates for obtaining loans is quite low at this stage, meaning that credit availability is high. Moreover, the ease of obtaining mortgages is also high thereby leading to increased demand for housing and constructive units to accommodate the increased demand. Additionally, the increase in credit and low interest rates make it possible for investors to easily fulfil the gap by developing the units at prices affordable to the public as a result of the increase in employment and income rates (Finkel 57). The overall result is that housing units tend to increase exponentially during this period.
On the other hand, the bust period in the construction industry is defined by a period during which the availability of credit is greatly limited. This leads to difficulty in sustaining the existing construction projects and even coming up with new ones. Similarly, the hard times brought by reduced employment opportunities and lack of easy credit availability means that the demand for housing units is bound to fall. The fall in demand will subsequently lead to a reduction in the prices of the units, which will translate to losses to the investors in relation to the amount used in coming up with the units (Heilbroner 83). In light of this, the industry will most likely grind to a halt and most units will remain unsold as increased economic hardships will impede individuals from being able to purchase or rent these units.
From the foregoing analysis, the boom and bust evaluation of the construction industry highlights how it is greatly affected due to its nature such that units cannot easily be liquidated to try and mitigate the effects of a recession. It is also worth noting that the time it takes to move from boom to bust defines the impact of the bust effects to quite an advanced level (Heilbroner 72). Therefore, a detailed understanding of the intricate particulars of the economics of boom and bust should always be taken into account when looking into the boom and bust nature of the construction industry due to its particularly impulsive nature.
Finkel, Gerald. The Economics of the Construction Industry. Texas, TX: M.E. Sharpe, 1997. Print.
Heilbroner, Robert. Economics Explained: Everything you need to know about how the Economy works and where it’s going. New York, NY: Simon and Schuster, 1998. Print.