Real Estate Markets and Demand and Supply

Question 1

What is Real Estate?

Answer 1

Real Estate refers to anything that can be owned or possessed and that comes in the form of land and buildings. OR the bundle of rights associated with the ownership and use of land and buildings. (e.g. walls, fences etc.)

Question 2

What are the tangible asset of Real Estate?

Answer 2

The tangible asset of Real Estate are the land and its permanent improvements.

Question 3

What are the intangible asset of Real Estate?

Answer 3

Bundle of rights reletaed to the use or ownership of land and buildings.

Question 4

What are the activities involved with Real Estate?

Answer 4

Sale, leasing, management, maintenance,

production of real property assets.

Question 5

What are the characteristics of Real Estate?

Answer 5

Highly heterogeneous, large lot sizes (covers large areas), long life span (properties), supply highly dependent on current stock availability (quantity), obsolescence issues (properties physical features) and spatial immobility.

Question 6

What is the Real Estate market?

Answer 6

Buyers and sellers exchange and distribute Real Estate resources (goods, services and capital).

Question 7

What are effective demand and effective supply?

Answer 7

Effective demand and effective supply are the amount
of demand and supply expressed in the market at a
particular moment in time (flow of demand and supply).

Question 8

What is effective demand in Real Estate?

Answer 8

Effective demand is the total stock of demand (total demand which includes satisfied and unsatisfied demand) for properties in the market at any point in time.

Question 9

What is effective supply in Real Estate?

Answer 9

Effective supply is the toal stock of properties at any point in time.

Question 10

What is the price of property?

Answer 10

Price of property depends on the interaction between effective demand and effective supply. Price increases or decreases depending on the quantity of demand and supply.

Question 11

What is the value of property?

Answer 11

Value of property depends on the interaction between stock of demand and supply (quantity of demand and supply at that particular time).

Question 12

What are the characteristics of Real Estate Markets?

Answer 12

Long contracts and inflexible terms,
Transactions concern property rights rather than properties,
Lack of a distinct marketplace,
High transaction costs,
Highly regulated new-build sectors,
Imperfect information.
Price differentials tend to be stable over time, hence, very predictable,

Question 13

What are the sub-sectors in the Real Estate market?

Answer 13

Occupation/User sector,
Investment sector,
Development sector.

Question 14

Who is part of the the Occupation/User sector of the Real Estate market?

Answer 14

Offices,
Retail,
industrial/warehouses,
Residential.

Question 15

What does the Bid Rent theory by William Alonso (1964) states?

Answer 15

The Theory of Land Rent by William Alonso states that the price and demand for real estate increases as the distance from the central business district (CBD) decreases and viceversa. Thus, Competition for space increases. There is a trade-off between prices and the distance from CBD.

Question 16

What does the Central Place theory by Christaller (1933) states?

Answer 16

The Central Place theory states that settlements form in clusters (groups). Consumers and sellers have equal economic and purchasing power to affect the placement of markets and services.

Question 17

Who is part of the Investment sector in the Real Estate market?

Answer 17

Insurance companies,
Pension funds,
PUTs, 
Property companies, 
REIT (Real Estate investment trusts),
Individuals.

Question 18

What is the role of the Development sector in the Real Estate market?

Answer 18

The Development sector responds to the demand for properties. If demand increases development activity begins.

Question 19

What are the macro-economic drivers of Real Estate?

Answer 19

Demographics,
Government policies (fiscal policies can affect the demand and supply of real estate e.g. Shared Ownership),
Economic cycles.

Question 20

How do economics cycles influences Real Estate?

Answer 20

Real Estate follows secular trend and capital markets.

Question 21

What does the Richard Barras Three-cycle model shows?

Answer 21

The Barras model shows how Real Economy, Property cycles and Money Economy interact between each other during different economics cycles. During upturn in Real Economy, demand of properties rises (Property cycles) and so does the Money Economy (expansion, credit boom). During dowturn and recession in Real Economy, demand of properties decrease (Property cycles) which cause a recession in the Money Economy (high interest rates, less credit).

Question 22

What does the Market Cycles Quandrant model of Real Estate shows?

Answer 22

The quadrant model shows the four phases of the real estate cycle.
Recovery: Demand rises, competition increases pushing prices up.
Expansion: As prices rise, output increases.
Prices rise to unsustainable levels, demand starts to fall off,
Hypersupply: Additional supply hits the market too late, oversupply pushes prices down.
Recession: Producers cut back output until demand rises.

Question 23

What is the general assumption made in the theory of demand and supply?

Answer 23

The general assumptions are that the market operate rationality and are free market (no government intervention). Prices act as signals to both buyers and sellers.

Question 24

When does competition occurs?

Answer 24

Competition occurs when two or more firms rival for the same type of customers.

Question 25

What are the features of a very competitive market?

Answer 25

The main features of a very competitive market:
Many buyers and sellers;
Each buyer only purchases a small amount;
Each seller and buyers has limited influence on price due to the varieties of similar products and the high number of buyers.

Question 26

What are the basic types of market structures?

Answer 26

Perfect competition,
Monopolistic (imperfect) competition
Oligopoly,
Monopoly.

Question 27

What are the charateristics of perfect competition market structure?

Answer 27

Homogeneity of goods and services; 
Free entry and exit;
No preference for buyers; 
Numerous firms, buyers/sellers of the same product; 
Perfect product information; 
Buyers/sellers are price takers.

Question 28

What are the charateristics of monopolistic (imperfect) competition market structure?

Answer 28

Many sellers;
Free entry and exit;
Product differentiation (i.e. minor variations);
Sellers are price makers;
Consumer preference.

Question 29

What are the charateristics of oligopoly market structure?

Answer 29

Few sellers;
Collaborations may exist to jointly maximise profits(collusion);
Barriers to entry/exit;
Products could be homogeneous or differentiated;
Sellers are price makers.

Question 30

What are the charateristics of monopoly market structure?

Answer 30

The extreme opposite of perfect competition;
A single firm dominates the market;
No substitute for products;
Higher barriers to entry and exit;
Price maker;
Pure monopolies are rare in reality.

Question 31

What is the the individual demand?

Answer 31

The individual demand is the quantity demanded by one individual or firm.

Question 32

What is the market demand?

Answer 32

Market demand is the total quantity demanded by all consumers.

Question 33

What does the law of demand states?

Answer 33

The law of demand states that when the price of a good rises, the quantity demanded falls, when the price falls, the quantity demanded rises (Ceteris paribus, when all other conditions stay the same).

Question 34

What can cause a shift in the demand curve?

Answer 34

Shift in the demand curve are caused by external factors other than the price.

Question 35

If the shift of demand is on the left what happen to the demand?

Answer 35

When the demand shift the the left (inwards) the demand is decreasing.

Question 36

If the shift of demand is on the right what happen to the demand?

Answer 36

When the demand shift the the right (outwards) the demand is increasing.

Question 37

What are substitutes?

Answer 37

Substitutes are products which all satisfy a common want.

Question 38

What are complements?

Answer 38

Complements are products which are consumed together with other products.

Question 39

How do substitutes cause a shift in the demand?

Answer 39

The demand for one product increases when the price for the substitute good increases and vice versa.

Question 40

How do complemets cause a shift in the demand?

Answer 40

As the price of a product increases, the demand for the product will decrease and so will do the demand for complements and vice versa.

Question 41

How does income cause a shift in the demand?

Answer 41

When income increases. demand increases. When income decrease, demand decrease.

Question 42

What is the relation between normal goods demand and income?

Answer 42

When income increases the demand for normal good also increases.

Question 43

What is the relation between inferior goods (bad quality) demand and income?

Answer 43

When income increases the demand for inferior goods decreases.

Question 44

What can cause a shift in the demand curve?

Answer 44

Change in the prices of related goods or services;
Change in income;
Change in tastes, preferences and fashion trends;
Change in technology and productivity;
Change in population size and structure;
Change in expectations (forecasts of the future values of economic variables related to current decisions).

Question 45

How does a increase in tax for a goods affect its demand curve?

Answer 45

It will increase the price causing a movement along the demand curve; thus, a decrease in demand.