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RE Economics Question 2.
Combine knowledge of user and investor…
RE Economics Question 2.
- Combine knowledge of user and investor markets.
- Learn about pricing of these markets.
- Consider how the determinants of pricing might change over time.
User Markets
the use of property is a flow concept in market terms, which is important in order to distinguish the use of services provided by property either for production or consumption purposes from the stock of property
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Use, or potential use, underpins the value of property and by implication its investment value. The user market has traditionally received relatively little attention.
payment of rent reflects the prevailing legal system which structures the form of property rights available and the market conventions which have evolved over time to serve the requirements of the particular property market in question
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Individual user demand
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the rent offer for a property depends on:
a) the price of the non-property inputs used in production
b) the productivity of those inputs when applied to property
c) the market for the goods or services capable of being produced in that property
therefore the demand for non-residential property is a derived demand, reflecting conditions outside the property market itself such as the demand for the goods and services capable of being produced in a particular property as well as conditions in other factor markets and changes in available technology
the elasticity of demand for property then depends on:
a) elasticity of demand for the product or service produced in the property
b) property costs as a proportion of total production costs
c) the technical scope for substituting other inputs for property
d) the elasticity of supply of other inputs
the demand for property can be mapped by examining the surplus generated by non-property inputs when they are applied to a property of a particular size
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Non-residential: the demand price for a given property will be determined as a surplus after other inputs have been rewarded. this reflects the tradition in economics to calculate the payment to land as a factor of production i.e. its rent as the residual left after all the other factors of production - labour, capital and entrepreneurship - have been rewarded.
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the maximum rent offer that will be made will depend on the contribution that the property makes to utility or revenue
Market user demand
the market demand for user rights is the sum of individual demands, derived by the horizontal summation of individual demand curves and therefore dependent of the same determining factors as individual demand
Effective User Demand:
- will be less than the underlying demand or the total requirement for user rights where user rights are offered over multiple time periods
- differs for underlying demand when users enjoy continuing rights to occupation either through leases or owner occupation
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