Please enable JavaScript.
Coggle requires JavaScript to display documents.
Behaviour of the markets (2) (Methods of valuing individual investments …
Behaviour of the markets (2)
Factors affecting the supply of property
Development time (gaining consent and construction) - can be up to five years long
Economic growth- but the peak of the property development cycle lags behind peak of the business cycle, often resulting in a surplus of new property as the economy slows down.
Real interest rates, which affect the cost of borrowing in order to develop property
Statutory control- local planning authorities may frequently restrict development
Fixity of location, high transaction costs and segmented markets
Additional considerations for residential property
The State can influence supply through imposing constraints on new development in high demand areas, e.g. through planning restrictions or zonal prohibitions around major cities.
Demand can be influenced by the ratio of house prices to earnings levels. If the ratio is high, the number of individuals who can access adequate mortgage funds to make a purchase is restricted, even if interest rates are low
Other factors causing a change in demand for an asset class
A change in investors' preferences
A change in investors' income
A change in the price of alternative investments
Factors affecting investors' preferences
A change in their liabilties
A change in the regulatory or tax regimes
uncertainty in the political climate
Fashion or sentiment altering
Marketing
Education provided by the suppliers of a particular asset class
No discernible reason
Changes in investors' income
Some institutions have tightly specified investment objectives.
e.g. if an open-ended fund investing in emerging markets receives a large inflow of cash the managers must invest it in the markets specified in their marketing literature. This can force up prices in the target markets. The good returns generated might then encourage further investment, setting off a spiral of growth
Price of alternative investments
All investment assets are, to a greater or lesser extent, substitute goods. There is a strong correlation between the prices of different asset classes.
Technical innovation
Derivatives
Methods of valuing individual investments
(SHAM FADS)
Smoothed market value
Historic book value
Adjusted book value
Market value
Fair value
Arbitrage value
Discounted cashflow
Stochastic modelling
(+) and (-) of market value
(+)
Easily obtainable in most cases
Objective
Realisable value of an asset, so suitable for discontinuance valuations
Well understood
May be required by regulation