Week 1 - USB240 Property Economic and Property Cycles 2018 full size

USB240
Market Analysis

Week 1

Property Economics and Property Cycle

CRICOS No. 00213J 1

Queensland University of Technology

What will you learn today?

• Property Economic Fundamental

– Economic Indicators
– Economic Characteristics of Property
– Property Market
– Demand and Supply
– Economic of Planning

• Property Cycle

This is full revision notes and not all of them discussed at the lecture/ tutorial.
You can use for additional revision/ reading notes for your assignment/ exam.

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Economic Indicators

• https://www.youtube.com/watch?v=VCcqFUZAb
Zo

• What are the three health of the economy
indicators?

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Economic Indicators

• Income
• Employment types and unemployment rate
• Interest rates and lending requirements
• Exchange rate and balance of trade
• GDP and GDP growth
• Inflation
• Rates and tax
• Population
• Land use patterns (externality) and accessibility
• Vacancy rate

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Economic Indicators

• Population growth (demographic analysis in
week 4)

– Household size and household number
– Age distribution
– Composition

• ABS 1345.0 - Key Economic Indicators, 2014

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Economic Trends

• National and regional economic trends:

– GNP and GDP
– National income
– Balance of payments
– Interest rates
– Aggregate employment and unemployment statistics
– Number of permits and construction, price levels

index

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Economic Trends

• Local economic trends:

– Population
– Net household formation
– Diversity of the economic base of the community
– Level and stability of employment and unemployment

levels
– Wage rates
– Household or family income

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Economic Trends

• International economic trends:

– Balance of foreign trade
– Exchange rates
– Wage levels
– Interest rates
– Production level, volume of sale and price levels

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Property Characteristics

Whipple, R.T.M. (2006). Property Valuation and Analysis.
2nd Edition. Sydney: Thomson Lawbook Co.

• Physical characteristics

– Land (shape, size, topography, views, etc.)
– Improvement (drainage, fencing, building, etc.)

• Institutional characteristics

– Property rights (tenurial system, restrictions imposed at law)

• Economic characteristics

– Immobility
– Large economic units
– Durability
– Scarcity
– Land is unproductive by itself

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Economic characteristics

• Immobility (compared to other resources)

– Localised market, fixed location, ‘unique’

• Large economic units (assets, investment, worth)

• Durability – can last long time

– Indestructible, long life, long term investment

• Scarcity – not always easy to make more (fixed?
supply)

– Limited supply, inelastic, ‘economic’ supply

• Land is unproductive by itself

– Depends on use it is put to

Source: Whipple (2006, pp.23-24)

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Property Market

• Ideal market

– Arrange for the production and exchange of
commodities, services or intermediate or final goods

• The characteristics of a perfectly competitive
market (Whipple, 2006, p. 38):

– Large number of buyers and sellers

– Transactions taking place frequently

– The fact that the commodity traded is homogeneous
and divisible

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Ideal market (cont’d)

• Buyers and sellers having a sound technical
knowledge of the commodity traded

• Buyers and sellers having a sound technical
knowledge of the bargains made by each other

• Buyers and sellers entering or leaving the
market at will

• Participants being agree to compete with each
other and settle the price of commodity by a
process of competitive bidding at arm’s length

• Zero information and transport costs

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Property market

• Less organised institution

• Immobility and inhomogeneity of real estate

• Financial approvals for mortgage funds

• Buyers and sellers are spatially separated

• Brokerage business help bring them together

• Difficult to study market preferences and trends

• The registration of transfer documents is
complex and requires legal (conveyancing)
profession.

Whipple (2006, pp. 40-41)

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Market Structure

• Not such large number of buyers and sellers
• Not such volume of transactions
• Not identical products (or divisible exactly)
• Not perfect information

– Remember example from lecture about ex chemical
plant

• Not always willingness to buy and sell

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Property market

• Inefficiency

• Market structure (Submarkets and Substitute)

• Whipple (2006, p.44) mentioned that property
market may be:

– Oligopsony, monopsony
– Oligopoly

• Few firms/ sellers on the supply side and
• Many buyers on the demand side

Source: Baumol and Blinder in Whipple (2006, p. 45)

– Monopoly
– Bilateral monopoly

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Market arrangement

Arrangement Buyers Sellers

Oligopsony few many
Oligopoly many few

Monopoly many one
one
Bilateral monopoly one many

Monopsony one

Whipple (2006, p.44)

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Market Participants in real estate
transaction

• Buyers • Developers
• Sellers • Builders
• Renters • Managers
• Lessors • Owners
• Lessees • Investors
• Mortgagors • Real estate agents
• Mortagees

Source: Reed, R. (2007). The valuation of Real Estate, API

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Market
Participants

• Real Estate
Process by
Graaskamp in
Whipple (2006, p.
48).

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Market Segmentation and Product
Disaggregation

• Market segmentation:

– Differentiates the most probable users of a property
from the general population by their consumer
characteristics

• Product disaggregation:

– Differentiates the subject property and competitive
properties from other types of properties on the basis
of their attributes or characteristics

Source: Reed (2007, p. 195)

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Property Market Analysis

• Identification and study of demand and supply

– Demand side are the end users (prospective users)
– Supply side are competitors (existing and future)

• Marketability analysis

– Demand (desire, power, capture rate) and
– Supply (competitive and alternative/substitute)

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Market Studies

Brett and Schmitz,
(2009) Real Estate
Market Analysis:
Methods and Case
Studies, ULI, p.4

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Demand and Supply

Demand (generic definition)

• The relationship between the quantity of a good
that consumers plan to buy and the price of the
good when all other influences on buyers' plans
remain the same. It is described by a demand
schedule and illustrated by a demand curve.

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Demand and Supply

Supply (generic definition)

• The relationship between the quantity of a good
that producers plan to sell and the price of the
good when all other influences on sellers' plans
remain the same. It is described by a supply
schedule and illustrated by a supply curve

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Property Demand & Supply

• What determines the quantity of property
demanded?

• What determines the quantity of property
supplied?

• What is the role of price in rationing the quantity
supplied among those who demand that
quantity?

• Why do some property segment prices rise and
fall a lot, while other property prices are more
stable?

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The quantity of property that people plan
to buy depends on:

• The price of a property
• The prices of alternatives (such as property

rentals, alternate investments such as the stock
market, etc)
• Income (interest rate for loan)
• Expected future prices
• Population

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Other things remaining the same, the
higher the price of a property, the smaller
is the quantity demanded of it.

THE LAW OF DEMAND

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the higher the
price of a property,
the smaller is the
quantity demanded

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the higher the
price of a property,
the smaller is the
quantity demanded

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Other things remaining the same, the
higher the price of a property, the greater
is the quantity supplied.

THE LAW OF SUPPLY

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The law of supply

• Other things remaining the same, the higher
the price of a good, the greater is the
quantity supplied.

• Why?

– If the quantity produced of a good increases, the
opportunity cost of producing that good rises. And
firms are willing to sell more of a good only if its price
rises to cover the opportunity cost of producing it.

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When there is neither a

Price as a regulator shortage nor a surplus,
the price is the
equilibrium price and

• The price of a property regulates the the quantity bought and
quantities demanded and supplied. sold is the equilibrium

• The higher the price of a property, Equilibqruiaunmtity.
other things remaining the same, the
140

smaller is the quantity demanded 120

and the greater is the quantity

supplied. 100

• The lower the price of a property, Price $ 80
other things remaining the same, the 60
greater is the quantity demanded 40
and the smaller is the quantity
supplied.

• If the price is too high, there is a 20
surplus of property, and if the price 0
is too low, there is a shortage of
property. Quantity

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Equilibrium

• When demand decreases and supply increases, the
price falls and the quantity can increase, decrease, or
remain the same.

• When demand decreases by the same amount that
supply increases, the price falls and quantity remains the
same.

• When demand decreases by less than supply
increases, the price falls and the quantity increases.

• When demand decreases by more than supply
increases, the price falls and the quantity decreases.

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Town Planning & Economics

• Town Planning brings order and certainty to
development

• This certainty stimulates private sector

investment by reducing risk.
• Uncertainty however can also arise

– Development of new town plan
– Uncertainty of major infrastructure projects

• Planning controls is being viewed as:

– negative by developers
– positive by community

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Externalities
An argument for planning

controls:

• Efficient allocation of land resources does not
always exist through the price mechanism

• For example the price mechanism DOES NOT
take account of the EXTERNAL SPILLOVER
COSTS AND BENEFITS of the market.

– ie Land use can have a positive or negative impact
on adjoining land users/owners

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Government Action

Controls available???

• Pricing to include externalities – recover costs of
externalities (e.g. parking meters  congestion)

• Taxes and subsidies – housing grants
• Physical control (Town Planning)
• Externalities may be internalised – spread the

load

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Benefits of Planning Controls

• Improved Knowledge (by experts)
• Allowances for Externalities
• Imperfect Competition (government intervention)
• Provision of Public / collective goods
• Resource Mobility
• Income Redistribution

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Criticism of Planning

• Lack of Flexibility
• Ignoring existing benefits
• Ignoring effects of controls
• Control seen as negative
• Bureaucracy

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Impact of Planning Controls

• Effect on Individual Sites

– Limiting use / density: limits value

Marginal Planning Density
Revenue
& Control Reduced total value

Capital of land
Cost

Density
Market Optimal Density

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Impact of Planning Controls

• Effect on Individual Sites

– Limiting use / density: limits value

Marginal Controls oPnlanbnuinigldDeinnsgitydensity limits the
Revenue amount ofCcoantproiltal which may be
& invested in a site andRofetlhdaunecderdetfootarlevarlueeduces

Capital

Cost the surplus available for purchase of the

site, ie reduces the value of the land

Density

Market Optimal Density

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Pattern of Land Values

• Restricts where types of user can occur – impact
on supply and price

Price P1 S1
of Supply
Land P
P2 Demand

O CM Quantity of
Land

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Planning alters the pattern of land values eg by

restricting nwohPperlaaenthtnieignrhgnrcisooenftoLrfofailcsne) dsthmeVapayrlicbueeeobsfuoilftf.icIne a free
market (ie land

would be OP. Where controls limit the supply to OC, the

price rises to OP1 .

• Restricts where types of user can occur – impact

on supply and price

Price P1 S1
of Supply
Land P
P2 Demand

O CM Quantity of
Land

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Effect on Total Land Values

• The notion that land use is determined by price
so that patterns of land use reflect the highest
and best use means that segmentation of land
users occur.

• Each highest bidder forces the losing bidder to
move outwards from the most accessible
location.

• Planning interferes with this pricing mechanism
and therefore land use patterns

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Distributional Effects

• Economists argue that planning seeks to
improve the economic efficiency of the land use
resource.

• However there are direct and indirect
consequences which place social, political and
other issues above economic efficiency.

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Distributional Effects

• Land use restriction causes values to rise – this
may exclude certain user groups from land use
participation

• Planning may not therefore ensure the equitable
redistribution of the benefits of land utilisation –
indeed it may serve to restrict it further.

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Supplementary Effects

• Indecision of planning issues may cause blight.

• Bureaucracy adds to the costs of development /
redevelopment and may delay significant
structural improvements

• Planning gain or development contribution

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Redevelopment

Occurs when the value of the
cleared site exceeds that of the

property in existing use

Present
Capital
Value

Cleared
site
Value

PV

current

use
Time

Redevelopment

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Redevelopment

Value Shift Re-development is
delayed when ???

Present
Capital
Value

Cleared
site
Value

Redevelopment PV
current
use

Tim
e

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Redevelopment

Functional Obsolesence

Present Major tech Re-development is
Capital change conducted earlier when ???
Value renders
building Cleared
obsolete site
Value

PV

current

use
Time

Redevelopment

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