REAL ESTATE ECONOMICS
ASSUMING A DECREASE IN DEMAND, SUPPLY WILL
CHANGE:
● As demand falls, vacancies increase
● Increased vacancies lead to fall in rents/prices
● More space available at lower cost
● Long term effects of rent/price decrease:
⮚ Out-of-pocket costs for least desirable property
⮚ Costs exceed income generated
⮚ Abandonment or demolition
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REAL ESTATE SUPPLY IS
FIXED IN THE SHORT-RUN
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COMPARE PRICE/RENTS
WHEN DEMAND CHANGES
WITH FIXED SUPPLY
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If there is an increase in demand
● Increased demand reduces vacancies
● Reduction in vacancies increases rents and prices bid for
short-term fixed supply
● Those who cannot afford higher rents/prices:
⮚ Share space with others
⮚ Move to less expensive property
⮚ Increase density and intensity of use
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INEVITABLE REAL ESTATE CYCLES
● Characteristics of Real Estate that leads to
cycles:
⮚ Large economic and physical size
⮚ Need for debt
⮚ Government regulation
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If there is a decrease in demand
● Increased vacancies
● Decline in rents and prices
● Lower rents/prices leads to:
⮚ Moving up to higher price area
⮚ Reduced density
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Assuming an increase in demand, supply will eventually
change:
● Profit motive: Demand pushes rents & prices up
● Construction increases (if no growth limits)
● Supply overtakes increased demand, vacancies increase
● Vacancies lead to falling rents and prices
● Lower rents/prices:
⮚ Difference
between
building
costs/rents/sales
narrows
⮚ No longer profitable to build
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Rent Controls
● Rents are high because demand exceeds supply
● To rebalance the market:
⮚ Demand must decrease
⮚ Supply must increase
Rent controls tend to:
• Increase demand by keeping rents low
• Decrease supply by maintaining low rents
• Low returns for investors reduces construction
• Usually politically motivated
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Real Estate Market
● Imperfect market compels buyers and
sellers to use a real estate professional
● Professional has higher knowledge of
legal and technical aspects
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Real Estate Broker’s Role
● Client/customer rely upon brokers expertise
● Be a knowledgeable, ethical broker help overcome
market imperfections:
⮚ Updated on increase/decrease in demand & supply
⮚ Updated on market trends and transaction details
⮚ Awareness of rents/prices
⮚ Advice on available types of profitable investments
⮚ Lead principals through legal complexities
⮚ Give financing sources and alternatives
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Real Estate Sub Markets
● Occupancy – The desire to receive
direct services from the property
● Investment – The desire to receive
services in the form of a profit
⮚ May be non-monetary rewards
⮚ Prestige/pride of ownership
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MACROECONOMIC TRENDS
AFFECTING REAL ESTATE
VALUE
REAL ESTATE SUPPLY FACTORS
o Housing Supply
o New Construction Activity
o The Supply of Vacant Land
REAL ESTATE DEMAND FACTOR
o Population
o Purchasing Power
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NATIONAL GOVERNMENT ACTIVITY
o Housing and Urban Development Programs
o Energy and the Environment
o Government Banking and Monetary Policies
o Fiscal Policies
o Physical Policies
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FACTORS AFFECTING REAL
ESTATE VALUE
PHYSICAL FORCES
o Natural Resources
o Developed Resources
SOCIAL FORCES
o Family size and age-group distribution
o Neighborhood stability and attitudes about property
o Population growth, decline, or shifts at the
community, regional and national levels
o Life-styles and living standards, often combined with
other forces
o Attitudes about law enforcement, the role of
government and individual responsibility
o Attitudes about development, growth and ecology
o Attitudes toward public education
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POLITICAL FORCES
o Zoning and land-use regulations
o Building and safety regulations
o Environmental protection laws
o Police, fire and health protection services
o Crime preventions, education and recreation services
o Public works; power, water, transportation, sewers
and flood control
o Fiscal policy and taxation
o Monetary policy and control so Government sponsored urban redevelopment and housing finance
programs
o Regulation of industry and business
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CONCERNS FOR BOTH SUPPLY
AND DEMAND
IMPACT OF INFLATION
1. Actions of BSP Reserve
2. Speculators seeking gains
3. Rates of returns
4. Fiscal policy of government
5. Property and income taxes
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IMPACT OF ENERGY SHORTAGES
1. Transportation: Number of highways and cost
of travel
2. Utility rates
3. Size of homes
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