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

2. ANALYSIS OF PROPERTY MARKET – RESIDENTIAL REAL ESTATE
LECTURE 4
ANALYSIS OF PROPERTY MARKET – RESIDENTIAL REAL ESTATE

3. Learning objectives After reading this topic you will be able to:-
▪ Understand the urban land market and make an analysis about rents and prices.
▪ Identify what drives the rents and prices in residential real estate.
▪ Understand the urban housing market
▪ Examined how housing development, particularly density, varies across locations within cities, and evolves over time as cities experience population growth.

4. Introduction The Urban Land Market
The Urban Housing Market
Rents and Prices
i. Population, Land Supply, and Ricardian Rents.
ii. Growth and Rents.
iii. Growth and Prices

5. Rents and Prices Fundamental characteristic of urban land markets :-
i. Urban Commuting and Ricardian Rent
ii. Competition and Spatial Separation

6. Urban Commuting and Ricardian Rent (1)
The first fundamental characteristic of urban land markets is that land are more expensive at better location and cheaper at less advantageous sites.
▪ considered - Natural location amenities
(such as lakes or an ocean), man made location advantages (such distance to employment), cultural centers.

7. Urban Commuting and Ricardian Rent (2)
In the Ricardian definition, rent refers either to the payments that a tenant would offer for housing, or alternatively to the annual amount that an owner would be willing to pay for the right or occupancy or use. ▪ To illustrate how rent and location advantage interact – develop a very simply city.

8. Urban Commuting and Ricardian Rent (3)
Assumption :
- our city will be mono centric - it has only one employment center. Commuting to this center give rise to what is called Ricardian rent.
- In this city only commuting or access to a place of employment is the only location advantage that is considered.
- The density of development is fixed, - structure capital cannot be substituted for land.

9. Urban Commuting and Ricardian Rent (4)
When the housing market is in equilibrium in this stylized city, decreased rents as one move out from the city center must exactly offset the increasing commuting costs.
▪ Thus, our styling city has the following features:-
i. Employment is at a single center, to which households commute along a direct line from their place of residence.
ii. Households are identical, and the number of workers (commuters), per household is fixed.

10. Urban Commuting and Ricardian Rent (5)
i. Housing has fixed and uniform characteristics at all locations ii.Housing rent is varies by location (commuting distance ). ii.Housing is provided by combining a fixed amount of land per unit of housing (acres) together with a fixed

11. Housing has fixed and uniform characteristics at all
locations - Housing rent is varies by location
(commuting distance ).
iv. Housing is provided by combining a fixed amount of land per unit of housing (acres) together with a fixed amount of housing capital (material and labor).
v. Housing is occupied by households who offer the
highest rent, and land is allocated to that use yielding the greatest rent.

12. Competition and Spatial Separation (1)
The second fundamental characteristic of urban land markets is that they tend to naturally separate different households or land uses spatially.
To illustrate this - extend our stylized city model to consider the situation
Assumption:-
- Two categories of households -
- (group 1) who dislike commuting intensely
- (group 2) mind it much less.

13. Competition and Spatial Separation (2)
As a result, we subscript the cost of commuting and have k1 > k2 - Consider two questions.
- First, will the two groups choose separate or intermixed locations, and which group will locate where?
- Second, what will house rents look like in this two household city?

14. Population, Land Supply, and Ricardian Rents (1)
Urban rents depend crucially on the distance to the city edge - to examine how far a given city’s edge will be.
Involves three considerations:
i. The population of the city
ii. The density of housing
iii. The role played by the area’s topography in determining the supply of land.

15. Population, Land Supply, and Ricardian Rents (2)
The historic growth of urban land rent can depend on a number of factors, but Ricardian model suggests that the most important of these is the growth of a city’s population. T
Cities grow and expand gradually as the population of a region is largely responsible for increases in location or land rents.

16. Growth and Rents (1)
It is complicated one to jump from housing (or land) rents to housing (or land) price.
Four factors are central to determining the rate at which income is converted into value:
i Long term interest rates
ii. The expected future growth of current rent
iii. The risk or variance associated with that rent
iv. The federal tax treatment of real estate.

17. Growth and Rents (2)
We will focus mainly on the role of interest rates, taxes and expected rental growth.
Thus, to understand how housing prices are determined at a particular location, we must examine what is happening to rents at that location as a city grows over time.

18. Growth and Prices (1)
The price of housing in any location that is already developed At any time will simply equal the present discounted value (PDV) of the rental income.
There are several important lessons about house rent, prices, and capitalization rates:-
i. When there is no expected growth in the city as a whole, the interest rate and capitalization rate is constant across all locations within the city.

19. Growth and Prices (2)
As the city grows spatially (for example, from population increases), the capitalization rate becomes less than the interest rate and no longer is constant across locations.
Houses prices tend to grow over time at the same percentage rate as housing rents: faster at the urban fringe than at the urban center, and more slowly at interior locations.

20. The Urban Housing Market
Structural Attributes and Density
i. Urban Density
ii. Housing Attributes and Household Preferences
iii. Housing Attributes and New Construction
iv. Residential Density, Land Value, and Highest Use
v. Location and Residential Density
vi. Patterns of Urban Development and Redevelopment
vii. Redevelopment, Occupancy, and Land use Succession

21. Structural Attributes and Density
Fundamental characteristic of urban housing markets :-
i. Urban Commuting and Ricardian Rent
Competition and Spatial Separation

22. Urban Density
The density at which residential real estate is developed frequently varies widely within a metropolitan area.
▪ Reason for variation in density:
- locations rent , Price of land - substitution occurs between land and structure (process factor substitution) .
- At locations at which land is more valuable, development tends to use less land per housing unit and relatively more structural capital.
▪ So, density , greater density , value of land

23. Housing Attributes and Household Preferences (1)
▪ Consider two houses that are both purchased for RM 120,000 - This purchase price reflects housing expenditures. (e.g. In Batu Pahat, for example, RM 120,000 of expenditure might buy a three bedroom home in a middle income suburban community. In Kuala Lumpur, the same expenditure might purchase only a one bedroom home in a marginal neighborhood)

24. Housing Attributes and Household Preferences (2)
Housing is a heterogeneous commodity –
- Differ in structure size and characteristics
- Differ in the location and type of lot
- Differ goods and services when it selects a house, including neighborhood and school district
- Differ the components of the structure itself.
- Differ prices depending on the quality of community schools or other public services.

25. Housing Attributes and Household Preferences (3)
In studying housing markets - it is important to distinguish between the expenditures that households make and a true measure of price.
A true market price is defined for a fixed quantity of a good.
In the housing market, we generally observe expenditures, not price per standard quantity (or quality) of housing - housing is quite different from other markets that economists study where standardized unit prices are directly observed.

26. Housing Attributes and New Construction (1)
Understanding the value that consumers place on specific housing attributes can provide the key to successfully developing residential real estate.
It also helps to explain the preferences of consumers and their willingness to pay for those preferences that dictate the type and configuration of housing that gets built.
So, consumer prices must be judged against the cost of providing the good.

27. Housing Attributes and New Construction (2)
More modern homes tend to be larger – one or both of two market changes.
i. The cost of construction (per square foot) could have come down through technological improvements.
ii. Consumers could have changed their preferences and become willing to pay more for additional space.

28. Housing Attributes and New Construction (3)
Thus, market suppliers should learn about their clientele - the homes that are constructed generally are those with the most profitable configuration of attributes.
In this way, the units added to the stock each year tend to reflect both the market preferences and the construction technology prevailing at that time.

29. Residential Density, Land Value,and Highest Use (1)
Land developed - the density of the development (i.e. number of housing units per acre).
▪ Density determines the number of units to be developed per acre - Important determinant of the location rent per acre that can be obtained from the site.
▪ Density is determined in a manner that maximizes the profit from development - a site’s location features and the structural characteristics of potential housing determine the amount of location rent that will accrue to any particular housing unit.

30. Residential Density, Land Value,and Highest Use (2)
▪ Density , unit’s value (through the loss of open space, green area, and privacy) , number of units on the land . ▪ The density of development should be maximizes the potential residual value of the land. ▪ Density can be measured into two ways: i. Ratio of housing units to total land area of the property ii. Ratio of total housing floor area to total land area

31. Location and Residential Density (1)
Residential density normally tends to be higher at more valuable location where location rent is greater.
Real estate is developed at similarly high densities in downtown areas, even, in the suburbs (apartments tend to be developed near shopping areas or business district).
More profitable to develop more desirable sites at higher density.

32. Location and Residential Density (2)
The rule would apply: increased location rent encourages a substitution away from land usage, and this yields higher development density.
Is it actual cities have patterns of residential density that look like this ?
* In most cities, residential density is greatest both at the center and at strategic suburban, however, cities generally have optimal market development densities at most locations.

33. Patterns of Urban Development and Redevelopment (1)
As cities grow over time, the location of new development tends to occur in distinct patterns.
As a rule - new development mainly occurs on vacant land at existing edge of the city - tendency for population growth to increase urban development.
The density of development that occurs at the urban edge will be based on two considerations:
i. The shape of the housing demand and construction cost schedules.
ii The value of vacant fringe land (based on agricultural rent and the value of the development option).

34. Patterns of Urban Development and Redevelopment (2)
Redeveloped - When existing structures are purchased and demolished to create vacant land for new uses.
Redevelopment represents an adjustment process by which housing capital is gradually replaced. In the process, historic density is upgraded to more modern market density.
Important force in shaping the land use patterns of many cities.

35. Patterns of Urban Development and Redevelopment (3)
The rule for redevelopment of a site to occur - the net residual value of land if developed optimally must exceed the gross value of land and capital that currently exists on the site plus the cost of demolishing the old capital.
2 type of redevelopment:-
i. Rapid adjustment - cities will look quite modern (vertical and horizontal redevelopment occurring at the same time at the urban fringe) - The result is that density throughout the city will be closer to those market levels.

36. Patterns of Urban Development and Redevelopment (4)
Slow adjustment - the housing stock of cities will have an evolutionary character to it. This suggests that we should closely examine the economic conditions that will generate redevelopment Slow adjustment - the housing stock of cities will have an evolutionary character to it. This suggests that we should closely examine the economic conditions that will generate redevelopment

37. Redevelopment, Occupancy, and Land use Succession (1)
Redeveloped Interior land to new density levels - the occupants of that land will often change.
Combined changes in occupancy and density of use - land use succession.
Understanding such patterns can be important in determining when and where redevelopment will occur and for whom the new uses should be built.

38. Redevelopment, Occupancy, and Land use Succession (2)
In principle - after a long enough period of time, the pattern of land use might eventually change - the process of land use succession – one use gives way to another, with a combined alteration of density

39. Redevelopment, Occupancy, and Land use Succession (3)
Complexity of determining the true highest and best use for urban land.
If the land market is functioning well, it should be the case that at current housing density levels, the present occupants of an area do indeed represent the highest paying users.

40. THANK YOU