ECONOMY FOR REAL ESTATE (BPE 33902) Prepared By:- Sr Norjariah binti Arif, Department of Real Estate Management, FPTP, UTHM. 11 November 2013

LECTURE 7 MAACROECONOMIC ANALYSIS FOR REAL ESTATE MARKET – RESIDENTIAL REAL ESTATE

Learning objectives After reading this topic you will be able to:- Understand the market for housing – housing unit and housing services. Identify the importance of demographic factors in determining the demand for housing units. Analyze the market for housing services and housing units

Introduction Each metropolitan area has its own local housing market . The national housing market represents the average behavior across these different local markets. - Examining prices and density. - Tracking trends in the national market over time. - Provides a useful basis for comparing movements in individual markets.

Cont… In studying housing markets - we use two different measures of housing: i. Housing units – Examine market for housing units, we count all units equally regardless of their characteristics (unit quality, range of unit amenities, or the unit’s neighborhood location). ii. Housing services - Attempt to sort out the differences in housing units. - Housing services are defined as the total quality and quantity of housing consumed. - Housing services include the size of the structure and lot, the characteristics of the unit, and any locational amenities (e.g. quality of public school, parks and local taxes).

Housing Unit Household Formation and The Demand For Housing Units Tenure Choice Price of Housing Financing homeownership

Household Formation and The Demand For Housing Units Population plays an important part in the operation of the housing market. - In 2010, the resident population of the Malaysia was 28 million people, imagine the number of houses needed with an an average household size of 6.0 people. - The demand for housing can be measured by the number of households - indicates the change in overall housing demand

Cont… Households - is a single individual or a group of individuals (related or unrelated) living in the same dwelling unit. Factor affecting households: i. Age - age distribution of the population can be expected to later the number of households formed from year to year. ii. Lifestyle – Delays of marriage and childbearing iii. Increase rate of divorce iv. Lower birthrates v. Fewer remarriage * Changes such as these can significantly impact the type of housing unit demanded.

Tenure Choice Tenure choice – the decision to rent or to own a home It is an important one for most households. - Households that move frequently for work or recreational opportunities may find renting less costly. - Mobile households might choose to rent : - Transaction costs associated with renting are far lower than those connected with homeownership. - Fees for lawyers, insurers, and the mortgage lender can range from 1% to 3%

Price of housing Price = market price (quantity, quality ) In this respect, housing is quite different from other markets that economists study in which prices per standard unit and the units consumed are directly observed two approaches: i. Hedonic approach ii. Repeat sales approach.

Hedonic prices Indices A hedonic price equation is simply a relationship between housing unit attributes and market prices (rather than individual household offer prices). Observe the multiplicative relationship between a house’s market price and its measured structural and locational attributes.

Repeat Sales Price Indices This technique also uses market sales or transactions data to track changes in prices over time. The repeat sales method - examines only transactions in which the same house has sold more than once during the time period under examination. The repeat sales estimates are automatically quality – controlled if there have been no alterations or renovations to the housing unit between the two (or more) transactions. If improvements or renovations have occurred between transactions, the repeat sales methodology will over state the increase in house prices.

Financing Homeownership Cash down payment - household typically is required to pay between 5 to 10 percent of the purchase price in the form of a, financing the remainder with a mortgage. When purchasing a home, a. A mortgage is a secured loan in which the borrower pledges the home being financed as security rate, payment schedule, and amortization period (the term of the loan). The standard mortgage instrument in Malaysia is 25 year, fixed payment mortgage (FPM) which has a fixed interest rate.

Housing Services The Market for Housing Services: Moving, Sales, and Vacancy Households and Their Housing Consumption Patterns Income and Housing Consumption :The Elasticity of Demand Housing Consumption and Life Cycle

The Market for Housing Services: Moving, Sales, and Vacancy In microeconomic showed that types of services provided by a particular house depend very much on its configuration. The utility that a household derives from certain types of houses and their associated services certainly depends on the type of household and its particular needs. Others factor : Preference, Space, Household age, income, and size. Competitive housing market will efficiently match each type of house with those households willing to pay the most for that unit’s particular features.

Cont.. demand for housing services changes significantly over the life cycle of any individual household Shifted in the demand for housing services : - Arrival of children - Increasing economic success - Retirement Such shifted in housing demand lead households to move – to seek a new and more appropriate unit and then vacate the unit previously occupied.

Cont… The housing vacancy rate (the excess of units over households) plays an important role in facilitating this transaction market house prices are strongly influenced by the combination of the vacancy rate and the fraction of households who are seeking to move. Household’s mobility is high and the vacant inventory low, prices will rise rapidly - eventually dissuading households from seeking a new house. Conversely, a large inventory and low mobility will lower prices encouraging households to move and make the needed adjustment to their consumption of housing services.

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