MODULE NO.

Course No.: PS 106

Course Title: REAL ESTATE ECONOMICS
Course Description: ECONOMIC PRINCIPLES APPLICABLE TO REAL ESTATE
TRANSACTIONS

Real Estate Economics

This is the study of the economic conditions related to the real estate market. At the “macro”
level - it focuses on analysing the market size of supply and demand, prices, and related financial
aspects. Specialized fields of the real estate economy are studied, such as for example – Housing
and Condominiums. At the “micro” level, real estate economics focuses on the economic impact of
the market upon the individual homeowner, buyer, renter or investor.

Participants in the real estate industry

Just like in any economy, the real estate economy has two major participants. Those who
provide the supply of real estate to the market and those who provide the demand; or the producers
and the consumers.

Producers:
- property owners who offer their properties for sale or lease;
– companies who develop subdivisions and condominiums for sale;
– entities who build real estate properties for business, office buildings, hotels,
resorts.

Consumers:
– those who buy real estate for their own use;
– those who lease homes, condos, offices, and commercial spaces for business;
– those who purchase real estate as an investment;
In general, a large segment of the population partake of the real estate economy whenever they
spend their money in products and services that were capitalized by real estate – such as hotels,
resorts, leisure businesses, etc.

The participants in the real estate markets can also be classified as follows:
1. Owner/User: These people are both owners and tenants. They purchase houses
or commercial property as an investment and also to live in or utilize as a business.
 Owner: These people are pure investors. They do not consume the real estate that
they purchase. Typically they rent out or lease the property to someone else.
 Renter: These people are pure consumers.
2. Developers: These people prepare raw land for building, which results in new products for
the market.
3. Renovators: These people supply refurbished buildings to the market.
4. Facilitators: This group includes banks, real estate brokers, lawyers, and others that facilitate
the purchase and sale of real estate.
The owner/user, owner, and renter form the demand side of the market, while the developers
and renovators form the supply side. In order to apply simple supply and demand analysis to real
estate markets, a number of modifications need to be made to standard microeconomic assumptions
and procedures. In particular, the unique characteristics of the real estate market must be
accommodated.
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REAL ESTATE MARKET CHARACTERISTICS - These characteristics include:

 Durability. Real estate is durable. A building can last for decades or even centuries, and the
land underneath it is practically indestructible. Because of this, real estate markets are
modelled as a stock/flow market. About 98% of supply consists of the stock of existing houses,
while about 2% consists of the flow of new development. The stock of real estate supply in
any period is determined by the existing stock in the previous period, the rate of deterioration
of the existing stock, the rate of renovation of the existing stock, and the flow of new
development in the current period. The effect of real estate market adjustments tend to be
mitigated by the relatively large stock of existing buildings.

 Heterogeneity. Every unit of real estate is unique in terms of its location, the building, and its
financing. This makes pricing difficult, increases search costs, and greatly restricts
substitutability. To get around this problem, economists define supply in terms of service units;
that is, any physical unit can be deconstructed into the services that it provides. Further, the
real estate market is typically divided into residential, commercial, and industrial segments. It
can also be further divided into subcategories like recreational, income-generating, historical
or protected, and the like.

 High transaction costs. Buying and/or moving into a home costs much more than most types
of transactions. The costs include search costs, real estate fees, moving costs, legal fees, land
transfer taxes, and deed registration fees.

 Long-time delays. The market adjustment process is subject to time delays due to the length
of time it takes to finance, design, and construct new supply and also due to the relatively slow
rate of change of demand. Because of these lags, there is great potential for disequilibrium in
the short run. Adjustment mechanisms tend to be slow relative to more fluid markets. Both an
investment good and a consumption good. Real estate can be purchased with the expectation
of attaining a return (an investment good), with the intention of using it (a consumption good),
or both. These functions may be separated (with market participants concentrating on one or
the other function) or combined (in the case of the person that lives in a house that they own).

 Immobility. Real estate location is immobile. Consumers come to the good rather than the
good going to the consumer. Because of this, there can be no physical marketplace. For
example, if tastes change and more people demand suburban houses, people must
find housing in the suburbs, because it is impossible to bring their existing house and lot to
the suburb.

COMMUNITY STRUCTURE
1. Accessibility – Proximity to consumer basic needs and use of facilities
2. Topography – The suitability of the land to commence community and maintain or sustain
the same
3. Transportation – Provision of means of mobility

LOCATION FOR ECONOMIC VALUES OF LAND

Land value is the value of a piece of property, including both the value of the land itself as well as
any improvements that have been made to it. Land values increase when demand for land exceeds
the supply of available land, or if a particular piece of land has intrinsic value greater than neighboring
areas (e.g. oil can be found on the land).

In economics, land comprises all naturally occurring resources whose supply is inherently fixed.
Examples are any and all particular geographical locations, mineral deposits, forests, fish stocks,
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atmospheric quality, geostationary orbits, and portions of the electromagnetic spectrum. Natural
resources are fundamental to the production of all goods, including capital goods. Location values
must not be confused with values imparted by fixed capital improvements. In classical economics,
land is considered one of the three factors of production along with capital, and labor. Land is
sometimes merged with capital to simplify micro-economics. However, a common mistake is
combining land and capital in macro-analysis. Income derived from ownership or control of natural
resources is referred to as rent. As a tangible asset land is represented in accounting as a fixed
asset or a capital asset.

ECONOMIC VALUES OF LAND

1. Location – proximity to the town center or points of interest
2. Property Values – usage and viability of land
3. Boundaries – natural or man-made structures establishing territorial delineation and
jurisdiction
4. Land Use Controls – limitations imposed by the government and other relevant bodies

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