1. UNIVERSITY OF PRETORIA
Presentation to the Board of Directors
International Studies
25 February 2019
INVESTIGATING PROPERTY PURCHASE POWER PARITY TO EXPLAIN ECONOMIC BEHAVIOR
Douw Boshoff
4 July 2013

2. Introduction: Land as commodity
Property Investment vs. Property Consumption
Buy vs. Build
Local vs. Non-local factors
Property Finance
Property Multiplier
PPPP index

3. Land as commodity: Amount of land is fixed
With population growth, number of people that have a claim to land increase (per capita land share)
Land already owned, due to fixed size, increase in value relative to per capita land share (land inflation)
All improvements to land is fixed, forming part of land, therefore also subject to land inflation
Improvements are durable with long economic life, but does depreciate over time (consumption)

4. Year
Population
Land (m2)
Rural land
Urban land
Urban owners
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

6. Land as commodity (cont.):
Land inflation is influenced by geographical factors:
Geographical boundaries, i.e. fixed land in specific area
Population growth of specific area, including migration
Specific use of land
Causes land inflation to vary in different geographical areas (property exchange rate)

7. Housing Costs as % of Net Income
Land as commodity (cont.):
Area
Housing Costs as % of Net Income
Above 25%
Above 30%
Above 40%
Regional Councils
Northland Region
20.4
13.5
Auckland Region
41.4
32.2
22.8
Waikato Region
32.0
23.2
11.0
Bay of Plenty Region
24.5
19.6
11.8
Gisborne Region
21.4
17.2
13.7
Hawke's Bay Region
31.9
26.3
Taranaki Region
30.2
24.1
15.1
Manawatu-Wanganui Region
33.0
23.7
11.9
Wellington Region
31.4
24.0
12.0
Tasman Region
26.4
22.5
Nelson Region
34.2
18.4
Marlborough Region
33.5
West Coast Region
22.3
Canterbury Region
32.4
14.4
Otago Region
25.5
21.6
12.3
Southland Region
12.8
9.5
Total, New Zealand 
32.7
24.9
14.8 7 7

8. Housing Costs as % of Net Income
Land as commodity (cont.):
Area
Housing Costs as % of Net Income
Above 25%
Above 30%
Above 40%
Regional Councils
Northland Region
20.4
13.5
Auckland Region
41.4
32.2
22.8
Waikato Region
32.0
23.2
11.0
Bay of Plenty Region
24.5
19.6
11.8
Gisborne Region
21.4
17.2
13.7
Hawke's Bay Region
31.9
26.3
Taranaki Region
30.2
24.1
15.1
Manawatu-Wanganui Region
33.0
23.7
11.9
Wellington Region
31.4
24.0
12.0
Tasman Region
26.4
22.5
Nelson Region
34.2
18.4
Marlborough Region
33.5
West Coast Region
22.3
Canterbury Region
32.4
14.4
Otago Region
25.5
21.6
12.3
Southland Region
12.8
9.5
Total, New Zealand 
32.7
24.9
14.8
Auckland Region
41.4
32.2
22.8 8 8

9. Housing Costs as % of Net Income
Land as commodity (cont.):
Area
Housing Costs as % of Net Income
Above 25%
Above 30%
Above 40%
Regional Councils
Northland Region
20.4
13.5
Auckland Region
41.4
32.2
22.8
Waikato Region
32.0
23.2
11.0
Bay of Plenty Region
24.5
19.6
11.8
Gisborne Region
21.4
17.2
13.7
Hawke's Bay Region
31.9
26.3
Taranaki Region
30.2
24.1
15.1
Manawatu-Wanganui Region
33.0
23.7
11.9
Wellington Region
31.4
24.0
12.0
Tasman Region
26.4
22.5
Nelson Region
34.2
18.4
Marlborough Region
33.5
West Coast Region
22.3
Canterbury Region
32.4
14.4
Otago Region
25.5
21.6
12.3
Southland Region
12.8
9.5
Total, New Zealand 
32.7
24.9
14.8
Auckland Region
41.4
32.2
22.8
Southland Region
12.8
9.5 9 9

10. Property Investment vs. Property Consumption:
Land plus construction of buildings (property)
Resold from time to time, influenced by land inflation
Property is subject to depreciation (natural and use)
Commodity price of property is influenced by potential use
Cost of use is the present value of all future depreciation

11. Property Investment vs Property Consumption (cont.):
Total property consumption equals total depreciation
Depreciation increase with use, i.e. vacant property will have lower depreciation

12. Buy vs. Build:
Investor has the option to buy land and build according to own design and style; or
Buy existing already built property
Would pay a premium for not having to wait for construction to complete
Would require a discount for not having own design to individual requirements, as well as depreciation already taken place
Investor pricing decision originates from land plus construction cost, adjusted for premiums and discounts

13. Demand for property: FDW Model
Buy vs. Build: (cont.)
Demand for property: FDW Model
Figure 17:

14. Local vs. Non-local factors:
Cost of construction is a combination of:
Local factors (labour and local produced material)
Non-local factors (imported material)
Maximum cost = 100% local factor of highest labour (Refer Marxist theory)
High cost of labour - high cost of local factors, with possible move to cheaper imports or mechanised methods with imported machinery (focus on efficiency)
Low cost of labour - reduced local cost, but higher disparity due to necessary imported factors on higher priced properties, i.e. tiles, lifts, curtain walls, etc.

15. Property Finance: Property acts as security for possible loans
Maximum finance equals total value (refer land inflation) less depreciation
Finance depends on availability of money
Availability of money depends on total deposits (MMT)
Deposits (savings) are dependent on total income (Keynes)

16. Property Finance (cont.):
TNF = L + NC – D
Where:
TNF = Total Nominal Financing
L = Land (including Land Inflation)
NC = New Construction
D = Depreciation (leakage from economy)

17. Property Multiplier: All households needs property
All economic activity takes place on land or in buildings
New construction requires extensive labour
All labour attracts income resulting in deposits (not necessarily for property)
Increase available money (endogenous money)
New construction increase Fixed Assets (exogenous money)
Wealth effects due to increased property prices

21. Conclusion: PPPP index
Property prices are indicative of total economic behaviour based on property supply-side economics
Puts more emphasis on horizontal activity in the economy, with vertical interference by way of social housing and other infrastructure
Compares differences in land availability to economic welfare
Measures the different levels of the property multiplier
Measures property as exogenous (Keynes) and endogenous (MMT) money in different economies

22. Conclusion: PPPP index22 22

23. Thank you