Economics of

Real Estate
REAL ESTATE APPRAISER LICENSURE EXAM

Presented by:

PROF. AUGUSTO B. AGOSTO

Master of Arts in Economics
www.abagosto.com
 Prof. Agosto is the President and Chief Executive Officer of
AA+ Appraisal & Consultancy, Inc., a real estate appraisal,
consulting and research firm. He served as Consultant on
Housing of the Asian Development Bank, Japan
International Cooperation Agency and other private firms.
Also, he is the President of Society of Litigation Valuer Experts
Inc and 2020 Secretary General of Philippine Association of
Real Estate Board.

Mr. Agosto is a licensed Real Estate Appraiser, Broker ,

Consultant and Environmental Planner, and an accredited
Speaker of the Professional Regulation Commission

He is a graduate of AB Economics and Master of Arts in

Contact: Economics in the University of San Carlos, Cebu City, and a
www.abagosto.com degree in Land Valuation and Management in the University
mobile 0917 4885555 of the Philippines.
OUTLINE

What is Economics?
Law of Supply and Demand
Price Elasticity
Real Estate Markets
Government Role in Real Estate
 What is Economics?
It is a social science, a study of society or people.
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.

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 Origin of the word Economics
Derived from the Greek word οἰκονομία (oikonomia) from
οἶκος (oikos, "house") and νόμος (nomos, "custom" or "law"),
hence "rules of the house (hold for good management)

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Two Main Division of
Economics:
Macroeconomics is the study of the national, and
regional economy and its various segments, such
as income, output, employment, and growth.

Microeconomics is concerned with the individual

units within the general economy such as business
firms and households.

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Real Estate

Real Estate means land and buildings.

Land that which is affixed to the land,
with its appurtenances to the land, and
that which is immovable by law.

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 Characteristics of Real Estate
Immobility, which means that the land exists in one spot and can’t be
moved. You buy a piece of land and while you can dig down or build
up, that land is something finite and extant. You can alter the
topography, but you still own the space and that space isn’t going
anywhere.
Durability means that while building on the land may be torn down or
built up, that land is still permanent. What changes within it don’t
matter to its indestructibility. Real estate endures, and its durability
over time is an important characteristic to keep in mind..
Uniqueness. Each piece of land has its own distinct aspects, however
similar it may seem to its neighbour. The location of a piece of real
estate, accessibility to the site as well as the quality of the soil, air and
nearby water all play a factor into determining the viability of its
unique physical aspects.
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 REAL ESTATE ECONOMICS
it Is about people and how their actions affect real
estate use and values.
It 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.
the link between general economic theory and applied
real estate practice.

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Why study REAL ESTATE ECONOMICS?
Scarcity is a fundamental concept in economics, stemming
from the inherent limitations of economic resources
compared to the unlimited wants and needs of individuals
and societies. While human desires for goods and services
are boundless, the resources available to fulfill those desires
are finite.
Scarcity manifests in various forms, each presenting unique
challenges to the industry such as the limited availability of
land; depletion of natural resources; housing shortages; and
capital constraints.

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 Characteristics of Real Estate
Location, one needs to consider two aspects of this feature, i.e.
physical location and economic location. The elements present in the
physical location include, for example, the position of property
according to the four cardinal directions, levels of light or the direction
of winds. The economic location, on the other hand, (which is of
greater importance) includes, among other things, the availability of
local means of transport, sale, service, and production outlets.
High capital-intensive. Purchasing property, and maintaining it in a
sound technical state later on, always involves having to incur high
expenditures and, in the majority of cases, having to take a loan
Low liquidity means that it is not easy to turn property into cash

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 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 going to the consumers. Therefore, there is no physical marketplace. 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 have 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, agent’s fees, 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 than what it’s 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.
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Tools of Analysis

1. Circular Flow of Economy

The circular flow diagram illustrates

the flow of goods, services, and
payments between different sectors
of the economy, such as
households, firms, and government
entities. It shows how income is
generated, distributed, and spent
within the economy.

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 2. Production Possibilities Frontier (PPF)

The PPF illustrates the trade-offs and

opportunity costs associated with

Product A
allocating scarce resources to the
production of different goods or services.
It shows the maximum potential
combinations of output that can be
produced given resource constraints.

Product B
 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

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 Principles of Economics
1. People face trade-offs-Choosing one option means giving up another.
2. The cost of something is what you give up getting it-Consider opportunity costs.
3. Rational people think at the margin- Decisions are made by comparing
marginal costs and benefits.
4. People respond to incentives- Behavior changes when incentives change.
5. Trade can make everyone better off-Voluntary exchange benefits all parties.
6. Markets are usually a good way to organize economic activity- Prices and
resources are allocated efficiently through markets.
7. Governments can sometimes improve market outcomes-Interventions can
correct market failures.
8. A country's standard of living depends on its ability to produce goods and
services-Productivity determines living standards.
9. Growth of money leads to inflation- More money in the economy can increase
prices.
10. Society faces a short-run tradeoff between inflation and unemployment-
Policies can reduce one at the expense of the other.
 Factors 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 the production of goods (e.g.
machinery, 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.

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 Economic Systems

Scarcity is an inherent problem that all nations face due to the limited
nature of resources and the unlimited desires of people. Addressing this
challenge requires making difficult choices and trade-offs, prioritizing
certain needs over others, and finding innovative ways to maximize the
use of available resources.

Scarcity necessitates making choices about how to allocate limited

resources to satisfy as many wants and needs as possible. Nations
employ a variety of economic systems, market mechanisms, and policy
interventions to manage scarcity and its implications effectively.
A. Market Economies

Also called Capitalist or Private Enterprise systems

Features are:
Productive resources are predominantly owned by
the private sector
Economic decision making is decentralised, i.e.
the level of government intervention is low
Economic motivation is self interest (utility or
profit)
Competition
Markets and prices (the invisible hand)
B. Command Economies

Also called socialist or centrally planned economies

Features are:
Productive resources are owned predominantly by the
state or government sector
Economic decision-making is undertaken by a central
authority or government
Collective welfare (i.e. goods/services) distributed to
benefit the state as a whole, rather than individuals
Allocation by non-price mechanisms
Equity is valued
C. The Mixed Economy

All modern economies are said to be a mixture of:

market forces and
government intervention

There are both public and private sectors. The public

sector complements the private sector

Areas of government contr:

Relative prices of goods and inputs
Relative incomes
Patterns of production and consumption
Macroeconomic management
Basic Economic Questions in Economic System
Economic
Relation to Real Estate Examples in Real Estate Economics
Question

- Urban Redevelopment Projects: Balancing affordable housing,

In real estate, this involves deciding what
commercial spaces, and public amenities based on community
kinds of properties to develop,
needs.
What to considering factors such as residential
- Suburban Housing Developments: Meeting demand for single-
Produce? vs. commercial, affordable vs. luxury
family homes and community amenities.
housing, and mixed-use developments.
- Commercial Real Estate in Emerging Markets: Supplying office
spaces, retail centers, and industrial parks to support economic
growth.

Decisions about construction methods,

materials, and sustainability practices - Sustainable building practices in urban redevelopment projects.
How to impact real estate projects. Choices - Efficient construction methods and sustainable designs in
Produce? include traditional vs. innovative suburban housing developments.
construction techniques, sustainable - Cost-effective construction methods in commercial real estate
practices, and labor vs. technology. projects in emerging markets.

- Timing urban redevelopment projects to align with economic

Timing decisions in real estate are incentives and marketdemand.
When to influenced by market cycles, economic - Launching suburban housing developments during trends
Produce? conditions, interest rates, financing towards suburban living.
availability, and regulatory changes. - Capitalizing on economic growth phases in emerging markets for
commercial real estate projects.
Economists and Their Contributions to Real Estate

• Adam Smith is a classical economist. He based his theory on

mercantile laws. His theory of How the Nations acquire wealth is
based on the principle of free trade or laissez-faire. Advocated
for free-market capitalism and the invisible hand theory,
emphasizing the importance of individual freedom and property
rights.

• David Ricardo based his theory of rent on marginal

land and the surplus theory is applied here. He
introduced the concept of Rent based on fertility
•
and it is purely dealt with land though this principle
is also applicable to labour.

Karl Marx was a German philosopher, economist, and

revolutionary socialist born in 1818. He is best known
for his critique of capitalism and his belief in the
eventual overthrow of the capitalist system.
Critiqued capitalism and highlighted the role of
property ownership in perpetuating social inequalities.
 Alfred Marshall was a British economist born in 1842. He played a key role in the
development of neoclassical economics and is best known for his work "Principles of
Economics," published in 1890.

Developed neoclassical economics and introduced concepts such as marginal utility

and partial equilibrium analysis. His work provided a theoretical framework for
understanding supply and demand, consumer behavior, and market equilibrium.

Relation to Real Estate Economics: Marshall's insights into microeconomic theory and
market behavior are relevant to real estate economics. His analysis of supply and
demand, marginal analysis, and externalities help explain property values, market
dynamics, and the impacts of real estate development on communities and the
environment.

Johann Heinrich von Thünen was a German economist and landowner born in 1783. He is best known for
his work "The Isolated State," published in 1826, in which he introduced the von Thünen model of
agricultural land use.

Von Thünen was a German economist and landowner who introduced the concept of the agricultural
land use model, known as the von Thünen model, in his work "The Isolated State," published in 1826. This
model explains how agricultural land use patterns are determined by transportation costs and market
access.

Von Thünen's model provides insights into spatial patterns of land use and land value, which are
fundamental to real estate economics. The model suggests that land use intensity and land values
decrease as distance from the market center increases, reflecting the impact of transportation costs on
land use decisions.
 Law of
Supply and Demand
The Law of Supply
states that when the
price of a product is
lowered, with no
change in other
factors, less of the
product will be
supplied.
 The Supply of land is fixed
One of the fundamental principles of real estate
economics is the recognition that the total amount
of land is fixed.
The land surface cannot be increased or decreased
according to the whims of demand.
However, the intensity of land use can change, and
in time this will increase or decrease the supply of
real estate.

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Illustration on how an increase in
demand increases prices or rents

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Changes or Shifts in Supply

Changes in the cost of production

An increase or decrease in income
Changes in demand for a product
Business anticipation of future
prices and profits
The Law of Demand states that when
the pric e of a product is increased
with no change in other factors, less
product will be purchased.
Changes or Shifts in Demand
An increase or decrease in
population
An increase or decrease in income
Changes in consumer tastes and
preferences
Changes in the amount of credit
available
Effect of advertising
Supply and demand
Real estate demand curved with a
short run fixed supply

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 Illustrates how a decrease in
demand decreases price or rents

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 Illustrates how a decrease in
demand decreases price or rents

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What causes supply and demand
for real estate to change?
Changes in Population
Income
Availability of mortgage credit
Personal lifestyles
Government inactions.
Rate of Construction
Conversion
Demolition
Transportation patterns

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Price Elasticity
Elasticity is an economics concept that measures
responsiveness of one variable to changes in
another variable.

Price elasticity of demand measures how

responsive the quantity demanded is to changes in
the price level.

Price elasticity of supply is the percentage change

in quantity supplied divided by the percentage
change in price
 Categories of Elasticity

1. Elastic demand or elastic

supply is one in which the
elasticity is greater than one,
indicating a high
responsiveness to changes in
price.
2. Inelastic demand or supply are
less than one indicate low
responsiveness to price
changes.
3. Unitary elasticities indicate
proportional responsiveness of
either demand or supply
Example: Condominium Unit vs. Housing Unit

Scenario:

Let's consider two types of properties in a city: condominium units and single-detached
house and lot unit. We will analyze how each type of property might respond to a 10%
increase in price.

Average price of a condo unit increases from Php 1,300,000 to 1,500,000 (15%
increase). As a result, the quantity demanded decreases from 200 units per month to
160 units per month (20% decrease).

PED = -22.2%/14.2%
= -1.56
Example: Condominium Unit vs. Housing Unit

Average price of a single-detached house increases from Php 1, 500,000 to Php

1,650,000 (a 10% increase). As a result, the quantity demanded decreases from 150
units per month to 140 units per month (6.7% decrease).

PED = -6.7%/10% Comparing the two:

= -0.67 Condo unit: PED = -1.33

House & Lot. PED = -0.67

Indicates that buyers of condos are

more responsive to price changes than
buyers of house and lot.
 Factors Affecting Elasticity

Availability of Substitutes: Condominium units often have several substitutes,

such as rental apartments, townhouses, or other condos. This increases the
elasticity.

Luxury vs. Necessity: Many buyers consider condos more of a lifestyle choice or
luxury, especially in urban areas where amenities and location are key selling
points. This makes the demand more elastic.

Proportion of Income: Condos, particularly high-end ones, can be a significant

investment, making the demand more sensitive to price changes.

Market Segmentation: There is often a range of condo prices, from budget to

luxury, affecting elasticity differently within these segments.
 Price Elasticity and Total Revenue

Continuing our scenario, if you a developer and raise your unit

price from Php 1,300,000 to Php 1,500,000, would your revenue rise or
fall?
Revenue = P x Q
A price increase has two effects on revenue:

Higher P means more revenue on each unit you sell.

But you sell fewer units (lower Q), due to Law of Demand.

Which of these two effects is bigger?

It depends on the price elasticity of demand.

 Price Elasticity and Total Revenue
Average price of a condo unit increases from Php 1,300,000 to 1,500,000 (15%
increase). As a result, the quantity demanded decreases from 200 units per
month to 160 units per month (20% decrease).

Elastic demand = 1.5

P= 1,300,000
Q= 200 units
R = 260,000,000
Php 1,500,000
P = 1,500,000
Q = 160 units Php 1,300,000
R = 240,000,000

160 200
 Price Elasticity and Total Revenue
Average price of a condo unit increases from Php 1,300,000 to 1,500,000 (15%
increase). As a result, the quantity demanded decreases from 200 units per
month to 160 units per month (20% decrease).

Inelastic demand = -0.38

P= 1,300,000
Q= 200 units
R = 260,000,000
Php 1,500,000
P = 1,500,000
Php 1,300,000
Q = 190 units
R = 285,000,000
Real Estate Markets

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What is a “Market”?

● A place where buyers and sellers meet to

exchange items of value.

● Competition varies directly with:

Number of buyers
Number of sellers
Homogeneity of units available
Knowledge by all parties vs. advantage
over the other party to distort price or
market activity
 Market and Prices

Market – defined as a place where buyers and sellers

meet to bargain and exchange goods and services at
negotiated prices.
Markets have two extremes – markets with perfect
competition and markets with imperfect competition.

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 Perfect and Imperfect Market
Characteristics Perfect Market Real estate Market

Few participants; seller controls during “sellers

Number of Buyers and Sellers Many buyers and sellers market” and buyer controls during a “buyer’s
market.”

Buyers and sellers are highly knowledgeable; Buyers and sellers are not knowledgeable; the
Product knowledge and exchange
the exchange takes place with ease. exchange is legalistic, complex and expensive

All products are alike and interchangeable;

Each parcel of real estate is unique and separate
Standardized products there is little difference between products of
from all others; no two are exactly alike.
different sellers

Prices are influenced by the interaction of supply

Prices are established by the smooth action and demand, but not smooth; a lack of
Prices
of supply and demand knowledge by either the buyer or seller can
distort the market.

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In practice, most markets are imperfect. Some of the
characteristics of a perfect market are either missing or
distorted, preventing the principles of supply and demand from
operating efficiently.
It is important to recognize that the principle of supply and
demand operates differently in real estate markets.
In a perfectly competitive market- supply and demand react
quickly to changes in market conditions.
In the real estate market- supply is fixed in the short run and
cannot respond quickly to changes in market conditions.

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Monopoly – A market in which there is
only one seller
Oligopoly – A market in which there
are only a few sellers
Monopsony – A market in which there
is only one buyer
Oligopsony – A market in which there
are only few buyers
 PHILIPPINE COMPETITION ACT (R.A. 10667)

1. Anti-competitive agreements
Horizontal agreements (i.e., between or among competitors) which engage in –
Cartels, price-fixing; Bid-rigging; Output limitation; Market allocations are criminalized

2. Abuse of dominant position

NOT against bigness
Market dominance vs. abuse of market dominance e.g.:
Predatory pricing
Imposing barriers to entry
Tying arrangements

3. Anti-competitive mergers and acquisitions

M&As not prohibited per se, prevented only if promotes collusion;
Prevents, lessens or restricts competition
Real Estate Cycle
Boom = Prosperity times,
high activity, high
employment, increase
income and prices.
Recession = Decline from
high point, increased
unemployment, real GDP
decline.
Massive decline in sales,
very high rate of
unemployment.
Bottoming out of
depression or recession,
increased employment
and sales.

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Government Intervention
in Philippine Real Estate
Multiplier Effect of Real Estate

Housing activities generate

direct employment of an
average of 8.3 laborers for
three weeks or 124 man-days
per annum —roughly 5% of the
country’s total work force.

It has a 3.4-multiplier effect

to the economy
Government's Role in the Economy
Fiscal Policy - Government’s 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 the economy.

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 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)

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 Gross Domestic Product

The standard measure

of the value added
created through the
production of goods
and services in a
country during a
certain period.
 Employment

Job creation has always been part of the development

objectives of the Philippines. In 2016,
all sectors of the economy employed 40.8 million
workers, which is roughly 40 percent of the
entire population of the Philippines. In the last
decade, 2006-2016, employment increased by
25 percent from 32.6 million workers to 40.8 million
workers (Figure 6).
Comparison of Imports and Exports
Demography
Demography
 Interest Rate

Generally, interest rates are prices. These are the price

paid for the use of money for a period of time and are
expressed as a per centage of the total outstanding balance
that is either fixed or variable.

There are two ways by which interest rate can be defined:

first, from the point of view of a borrower, it is the cost of
borrowing money (borr owing rate); and second, from a
lender’s point of view, it is the fee charged for lending
money (lending rate).
 BALANCE OF PAYMENT

The Balance of Payments (BOP) is a summary of the

economic transactions of a
country with the rest of the world for a specific
period. It serves as an accounting
statement on the economic dealings between
residents of the country and nonresidents.
 Balance of payments

The balance of payments (BOP), also known as the

balance of international payments, is a statement of
all transactions made be tween entities in one country
and the rest of the world over a defined period
 Inflation Rate

Inflation is the rate of

increase in prices over a
given period of time
 Investment and Capital Markets

:
Explores how real estate fits into broader
investment portfolios, considering the role of
real estate investment trusts (REITs),
institutional investors, and the dynamics of
capital flows into the real estate sector.
 Overseas Filipino Remittances

Overseas Filipino remittance has been considered as one

of the significant sources of financial inflow to the
Philippines. There are about 10.2 million Filipinos
worldwide and about 2.2 million Filipino workers overseas
(based on PSA 2016 Survey on Overseas Filipinos).

Data from the Bangko Sentral ng Pilipinas (BSP) indicate

that in 2016, US$ 26.9 billion in cash remittances (through
banks) were transferred to the Philippines, corresponding
to about 8.8 percent of GDP; while personal remittances,
which include non-bank transfers, amount to US$ 29.7
billion, which accounts to about 9.7 percent of GDP.
OFW REMITTANCES
 Summary

Microeconomics and macroeconomics provide

complementary perspectives in understanding the
intricacies of real estate.

While microeconomics focuses on the individual

elements of property transactions,
macroeconomics considers the broader economic
forces that shape the entire real estate market.

Together, these aspects offer a comprehensive

view, essential for making informed decisions in
the dynamic and complex realm of real estate.
THANK YOU!

AB AGOSTO