Real Estate Economics
Prepared by:
Augusto B. Agosto, EnP, REA, REB
Faculty, University of San Carlos
Origin of the word Economics
Derived from the Greek word ? (oikonomia)
from ? (oikos, "house") and (nomos,
"custom" or "law"), hence "rules of the house (hold for
good management)
What is Economics?
Economics is a social science that is concerned with how
individuals and societies choose to use scarce resources
to produce, distribute and consume goods and services.
Two Main Categories of
Economics:
Macroeconomics is the study of the national economy
and its various segments, such as national income,
output, employment and growth.
Microeconomics is concerned with the individual units
within the general economy such as business firms and
households.
REAL ESTATE ECONOMICS
is a study that uses economic principles, both macro
and micro, to analyze the impact that national, regional,
community and neighborhood trends have on real estate
values.
It is the link between general economic theory and
applied real estate practice.
Why study REAL ESTATE
ECONOMICS?
Real estate economics helps people understand what
causes fluctuations in real estate activity and how these
changes can affect real estate markets.
Investors and licensed agents make real estate decisions
that influence that shape, form, and value property in a
given community.
Real estate decisions made today will be reflected in real
estate values in the cities and neighborhoods of
tomorrow.
Macroeconomic Indicators:
- Are statistics that indicate the current status of the
economy of the state depending on a particular area of
the economy (e.g. industry, labor market, trade)
Definition of Terms
Law of Supply - Producers will offer more products and
services for sale as prices increase and fewer as prices
decrease.
Market any structure, institution or system whereby buyers
and sellers meet and exchange goods and services with value
at negotiated prices. It facilitates the trade and enables the
distribution and allocation of resources in a society.
Perfect Market when there are many sellers and buyers
competing against each other
Imperfect Market when there are more sellers and few
buyers or more buyers and few sellers
Types of Imperfect Markets:
Monopoly Market in which there is only one seller
Oligopoly Market in which there are only few sellers
Monopsony Market in which there is only one buyer
Oligopsony Market in which there are only few buyers
Sellers Market and Buyers
Market:
Sellers market there are more buyers and few sellers
Buyers market there are more sellers and few buyers
Peculiarities of the Real
Estate Market
Immovability of the product - Real estate is locationally immobile or immovable.
Consumers come to the goods rather than the goods go to the consumers.
Therefore, there is no physical market place. People must move locations in order for
real estate markets to adjust or change.
Durability of the product- Ability to withstand wear and tear, pressure or damage.
Raw land is indestructible and immovable. Buildings, major infrastructures or
improvements in real estate has a long life span and can last for decades.
High Transaction costs- The financial requirement in purchasing a real estate
property is huge. One has to consider buying and moving costs, agents fee, local and
national taxes, and documentation and registration fees, among others.
Supply-Demand Time Gap- Any real estate production takes time to design,
construct and finance. Further, there is a relatively slow rate of change in the demand
for consumption of new supplies, especially during times of financial crisis.
Investment or consumption - Purchasing real estate can come with an
expectation of a return (investment good), an intention of using it (consumption
good), or both. This dual nature means it is common to see people over-invest in
real estate (investing more money in an asset that what its really worth on the open
market).
Heterogeneity - The state of one being different from another. Every real estate
property is unique in many ways: location, use, identification, size and shape,
building and improvement, financing, etc. No two properties are alike.
Agents of Production
Land and Natural Resources - the real estate component,
the raw material needed to produce new products like
residential homes, industrial factories, commercial spaces,
etc. It is compensated by rent/lease, mortgage and taxes.
Labor - the human physical work required to convert a parcel
of land into a property with improvements. It is compensated
by wages and direct/indirect costs (benefits, allowances).
Capital Any man-made instrument that increases
production of goods (e.g. machineries, tools, mechanical
lifts). It can also mean the cost of borrowing money in order
to forego production. It is compensated by interest.
Entrepreneurship The process of orchestrating land, labor,
and capital to produce an item. It is a type of coordination or
management. It is motivated by profit.
FISCAL POLICY AND
MONETARY POLICY
Fiscal Policy - Governments use of taxing and
spending power to help counteract recession,
unemployment and inflation.
Monetary Policy -The government uses monetary
policy when it increases or decreases the supply of
money in an effort to stabilize economy.
