Real Estate Economics - Assignment Example

Real e economics The role of pricing mechanism in the property market The pricing mechanism deals with the interaction of buyers and sellers towards reaching a market price. When the demand and supply are equal, equilibrium quantity and the price is reached. The price mechanism explains the allocation of the resources in the free market economy and the private sector towards the determination of the market price within the industry (Marcato and Key 2005, p.55 -63). The pricing mechanism determines the market prices of the property through the interaction of the demand and supply. The prices and value vary. Price is the value-in-exchange excluding sentimental values like the subjective value of the parental property. Market facilitates exchange of property; the location is not specific. The appraisal of the real estate and property and land valuation in development of the opinion of value in the real property express the market value. Need for the appraisals results from heterogeneous nature of the property as an investment class, with no identical properties. Absence of the pricing mechanism determines the need for the expert appraisal and valuation of the property (Marcato and Key 2005, p.55 -63). # 2. Location theory, static and dynamic views of market value of land, allocation and pricing Real estate comprises of attributes categorised as static or dynamic. The static attributes encompass the fixed location and the relationship with other locations; known as linkages, and physical structures on the site. The dynamic attributes entail emotional response elicited by the site in terms of, status, aesthetics, anxiety, status prestige and the off-site environmental influences. Location theory refers to geographic location of an economic activity, and it addresses the reason for the location of economic activities like the metropolitan area, city block, neighbourhood and the individual site. The determination of the static or dynamic market value of the land is calculated using minimum market spectrum in delivery of application. The land valuation may entail promoting the dynamic efficiency in achieving significant changes in allocating land and pricing. When the prices set motivate the changes in the spectrum, static efficiency and modest dynamic efficiencies are used (Marcato and Key 2005, p.55 -63). # 3. Cynical patterns in rental values Rental value refers to added value contributed by an individual in exchange for property. It is the amount that would be paid for renting similar property in same conditions within the same area. The cynical pattern in rental values is typically displayed when the economic value declines towards the trough, and the forces of demand and supply lead to a decline in the occupancy rate because of the prior weakening and over-building of the subsequent demand due to slackened economic activity. The occupancy rates are lowest at the trough of real estate cycle. The rental rates simultaneously approach lowest point of the cycle. Rental rate cycle lags the cycle of occupancy rate. Furthermore, the over-building and weakening of the general market demand causes the financial distress, increased mortgage foreclosures and delinquency, and the insolvency, particularly for the properties, which are less desirable. The low collections of the rental income perceive high risks and the depressed resale of the future property. These factors cause downward pressure on the current market values (Marcato and Key 2005, p.55 -63). In such cycles, the market value decline substantially under the replacement costs. The significant increase in the market occupancy as well as in the levels of the rental rates justifies the subsequent new constructions. The discount rates and the overall cap rate of the market rise within this risky environment. The lenders with considerable holdings in the real estate through the foreclosure process dispose the real estate due to regulatory and economic pressure (Marcato and Key 2005, p.55 -63). Nature of the performance of the real estate dramatically changes as the economic cycle moves towards the peak. The recovery of the economic cycle becomes more buoyant as the demand increases exceeding the supply. The space market for the property reverses itself. The occupancy rates improve followed by a lagged increase in rental rate. Subsequently, the property market increases with the increase in net operating income of the real estate property due to rise in rents with the falling vacancies. The lenders in real estate return to the market, and this provide the new debt capital for boosting the market values. The lagged cap rate decline following the cyclical upturn (Marcato and Key 2005, p.55 -63). # 4. Relationship between planning and the development of real estate Development of real estate refers to different activities ranging from renovation, release of the buildings, to purchasing the raw land and selling of improved parcels or land to other people. Developers coordinate the activities and convert the ideas found in papers into real property. The development of real estate varies from construction. Development entails financing the deal for builders to build at fixed cost under bond. Development process creates and renovates the real estate. On the other hand, real estate planning entails the management of the effective transfer methods for the assets. Planning constitutes the forces in the property markets (Marcato and Key 2005, p.55 -63). The relationship between planning and development in real estate arises from the construction and development of real estate. A developer experiences long lag from start to the end. Planning will enhance accurate forecasts for the future market place. The development process begins when the market conditions are favourable, depicted by the increase in vacancy rates and the decline in rental rates. The response to the increase in the space demand by the developer in the event of tight markets in real estate is impossible due to lags associated with the construction. Planning increases the vacancies and lowers the rent than without long lags during construction (Marcato and Key 2005, p.55 -63). # 5. Relationship between user and the investment sectors as determinants of investor demand for property assets The fundamental determinants for the investor demand like the investment sector such as equity and the bond markets influence the capital value for property investment. The investment yields isolate relationship existing between the current income and the capital value offering convenient analytical perspective in isolating the differences in the pricing structure between investment and the user markets (tenants). In asset performance and the property market, investment markets assume rationality in investors’ price for the assets through discounting the expectations for the future income. This requires premium risks due to uncertainty and market volatility. Anticipated future stream for the rent acts as the driver to capital value of the property assets. Certainty of rent decreases with extension of the period (Marcato and Key 2005, p.55 -63). The expected relationship between fundamental determinants and poverty should be specified to enhance the planning regime. The inverse strategies affect the relationship between the determinants. The planning regime enhances yields from the relationship. The high development costs decrease the developer’s profitability hence low supply (Mareato and Key 2005, p.55 -63). # 6. Interaction in the property market, across property sectors and locations, and between different property interests Property markets refer to institutional arrangements where real property is developed, traded and used based on different actors. The economic, social, political and the legal rules and conventions define the property market at the macro level. Property market acts as the institution with different characteristics determining the structure, function and the scope. The market and the non-market mechanism of occurrence of the activities of the property sector compose the property market. The property market at the micro level encompasses the operation of main organizations based on the structure and change. This defines the relationship between the organizations and institutions, and the interactive experience and the response to action (Marcato and Key 2005, p.55 -63). On the other hand, property interest confers the protection from the market pressures and inhibition of the change. Structure of the legal rights in property facilitates or restricts refurbishment and the redevelopment of the neighbourhoods and cities. The property market embeds in the wide, institutional environment that regulates or manipulates actors’ behaviour directly or indirectly in market operations (Marcato and Key 2005, p.55 -63). # 7. Market efficiency and the factors affecting the efficient operation of the property market An efficient market reflects correctly and fully the relevant information in the determination of the security prices. An efficient market correctly and speedily incorporates the available information into prices. Highly efficient markets attract more investors increasing the market liquidity. Factors affecting the market efficiency include the price cycles and nature of goods transacted, the volatility in prices, the cycles and the bubbles also affect the market efficiency (Marcato and Key 2005, p.55 -63). # 8. Factors influencing demand in direct property investment, and does institutional investor’s requirement vary from one investor to other investors? Some of the factors influencing the demand in direct property investment include the demographics that define the composition of the population based on gender, age, race and income. Demographic shifts affect real estate markets. The interest rates influence the purchasing power of an individual. Decrease in the interest rates decreases costs for mortgage, leading to increased demand for the real estates. The overall economic health affects indicators for the economy like manufacturing, employment and the prices. The economic cyclicality affects real estate differently. Economy influences the sensitivity of the property to the economic cycle, hence the demand of the property (Marcato and Key 2005, p.55 -63). Legislation by the government affects the prices and demand for property. The government subsidies motivate purchase of property, hence increased demand. The scale of investments in real estate influences the demand where investors invest directly in the physical real estate or indirectly through the managed funds. The institutional investor’s requirement varies from one investor to another based on the type of investment. For instance, partial ownership investors define the requirements for investors in land (Marcato and Key 2005, p.55 -63). References Marcato, G. & Key, T. (2005). Direct Investment in Real Estate. Momentum Profits and their Robustness to Trading Costs . Journal of Portfolio Management 31 (5). pp. 55-63. Read More