Land and Property Economics LE5003 200203

1
Land and Property EconomicsLE5003 2002/03

• Geoff Keogh
• (Property, University of Aberdeen Business
  School)
• Craig Watkins
• (Land Economy, School of Resources, Environment
  and Society

2
LE5003 Overview of course

• Module aim
• to examine land, property and planning from an
  economic perspective
• Module objectives
• to set land and property within a wider regional,
  national and international economic context
• to examine land and property as a set of linked
  markets, functionally divided between use,
  investment and development
• to consider regulatory constraints on property in
  economic terms, including planning
• to analyse specific property and planning
  problems within an economic framework

3
LE5003 Overview of course (contd)

• Knowledge outcomes
• to formulate explanations of property market
  behaviour
• to interpret market data relating to defined
  property markets
• to make a critical assessment of land use
  planning policy and methods of policy delivery
• to identify and judge appropriate techniques for
  the evaluation of specific planning policies
• Links to other modules
• Land Law (LE 5001), Planning and Development (LE
  5011), Valuation Principles (LE 5008) and Rural
  Financial Management (LE 5009)
• Property Investment (LE 5503), Advanced Valuation
  (LE 5517), International Property Market Analysis
  (LE 5520), Rural Practice (LE5519) and the
  European Field Trip

4
LE5003 Overview of course (contd)

• Teaching and assessment
• Lectures, divided into three blocks, each of
  which comprises two 2-hour lectures per week for
  two to three weeks.
• Seminars to support and consolidate the three
  blocks of lecture material, and a further
  revision seminar will be provided in the final
  week of term.
• Coursework report of 1500 words, representing 25
  of assessment (see course guide)
• Examination comprising 20 multi-choice questions
  and 2 (from 4) essays, representing 75 of
  assessment

5
LE5003 Overview of course (contd)

• Key references
• Land and Property Economics
• Balchin, P.N., Bull, G.H. and Kieve, J.L. (1995)
  Urban Land Economics and Public Policy, London,
  Macmillan (5th edition).
• Ball, M., Lizieri, C. and MacGregor, B. D. (1998)
  The Economics of Commercial Property Markets,
  London, Routledge
• Evans, A. W. (1985) Urban Economics, Oxford
  Blackwell
• Fraser, W.D. (1993) Principles of Property
  Investment and Pricing. London Macmillan (2nd
  edition).
• Harvey, J. (2000) Urban Land Economics the
  Economics of Real Property. London Macmillan
  (5th edition).

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LE5003 Overview of course (contd)

• Basic concepts in macro- and micro-economics
• Sloman, J and Sutcliffe, M (2001) Economics for
  Business. Harlow Pearson (2nd edition)
• Sloman, J. (2000) Economics. London Financial
  Times/Prentice Hall (4th edition)
• Hornby, W., Gammie, B and Wall, S (2001) Business
  Economics. Pearson (2nd edition)
• Other references
• Further references will be given as lectures
  progress
• On-line references/resources include property
  market reports and industry sources such as
  Estates Gazette Interactive, Property Week,
  Freemans News

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LE5003 Land and Property EconomicsLecture 1
Introduction to the economics of real property

• Geoff Keogh
• (Property, University of Aberdeen Business
  School)

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Lecture 1 Introduction/economic characteristics
of property

• Main topics
• economic problems and concepts
• economic characteristics of real property
• simple model of the property market
• Basic references (see notes page view)
• Sloman (2000) ch1
• Sloman and Sutcliffe (2001) chs 1-2
• Fraser (1993) ch 10
• Harvey (2000) chs 1-3
• Keogh (1994)

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The nature of economic problems

• Basic concerns of economics
• production of goods and services
• consumption of goods and services
• Constraints on production and consumption
• the resource endowment (land, labour, capital)
• technologies of production and consumption
• Central problem of economics
• constrained choice (ie choice in the face of
  scarcity)
• establishing the limits of economics
• economics and other social sciences

10
The nature of economic problems (contd)

• Macroeconomics
• study of the economy as a whole (nations,
  regions, etc)
• concerned with aggregate demand and aggregate
  supply
• issues of output, growth, (un)employment,
  inflation, etc
• Microeconomics
• study of individual economic decisions to produce
  or consume goods/services, or supply factors of
  production
• concerned with decisions of individuals,
  households, firms, etc
• assumptions of rational behaviour (and bounded
  rationality)
• Linking micro- and macro- economics

11
The nature of economic problems (contd)

• Some key economic concepts
• opportunity cost - the cost of one activity in
  terms of the best alternative foregone
• marginal benefit/marginal cost - the benefit/cost
  associated with the marginal (ie last) unit of
  some activity
• optimisation - balancing MB/MC for all activities
• economic efficiency - efficiency in production,
  consumption, specialisation and exchange
• allocative efficiency - where it is not possible
  to increase welfare by reallocating resources
  between different forms of production or
  reallocating goods between consumers (often known
  as Pareto efficiency)
• efficiency vs. equity

12
The nature of economic problems
(contd)Conceptualising scarcity and trade-off
13
Analysis of economic problems (contd)

• Positivist approaches
• application of deductive logic
• universal
• model building and hypothesis testing
• formal quantitative analysis
• Non-positivist approaches
• context driven
• application of inductive or deductive logic
• interpretative and critical social science
• formal qualitative and/or quantitative analysis
• Positive vs. normative economics

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Characteristics of real property

• Defining real property
• land or land plus capital
• physical property or legal interests in property
• Defining the real property market
• mechanism for reconciling demand and supply
• formal or informal?
• one market or many (defining sub-markets)?
• Market participants
• owners and users of property (investors,
  occupiers)
• producers of property (constructors, developers,
  etc)
• agents, advisers, financiers, etc

15
Characteristics of real property (contd)

• Real property as a financial asset
• Real property vs. other financial assets
• Special characteristics of real property

16
Characteristics of real property (contd)

• Assessing property market outcomes
• secures the highest and best use of land and
  property resources?
• secures an acceptable use of land and property
  resources?
• facilitates the accumulation of capital?
• Is the real property market efficient?
• allocative efficiency/informational efficiency
• efficient market hypothesis
• weak form efficiency
• semi-strong form efficiency
• strong form efficiency
• bounded efficiency (person/purpose efficiency)

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Characteristics of real property (contd)

• "It makes little sense for economists to discuss
  the process of exchange without specifying the
  institutional setting within which the trading
  takes place, since this affects the incentives to
  produce and the costs of transacting. (R.H.
  Coase, 1992)
• The property market as an institution
• institutions/organisations as rules, norms,
  conventions, structures, entities
• formal vs. informal institutions
• property market as an institution
• property market set within a wider institutional
  context
• property market as an institutional setting for
  organisational activity

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Characteristics of real property (contd)

• Explaining institutional form
• institutional form driven by transaction costs
• institutional stability and/or change driven by
  positive or negative feedback
• institutions evolve but do not necessarily
  increase in efficiency
• institutions reflecting knowledge and power
  relations
• importance of path dependency
• importance of values

20
Economic analysis of property some fundamentals

• Economic analysis of property
• simplifying models
• should capture the "essence" of property market
  problems
• should accurately reflect the real choices faced
  by participants in property markets
• should have regard to the "non-economic" aspects
  of property market activity
• should reflect the contribution of other related
  disciplines (eg law, valuation, planning,
  construction, etc.)
• should reflect the legal, social, institutional
  and historic context of property market activity

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A simple model of the property market
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Lecture 2 Demand and supply analysis

• Main topics
• to introduce bases of demand and supply plans
• to examine concepts of market equilibrium
• to explore property market adjustment in demand
  and supply terms
• Basic references
• Sloman and Sutcliffe (2001) chs 5-6
• Sloman (2000) ch 2
• Ball et al (1998) ch 2
• Fraser (1993) ch 15
• Harvey (1996) chs 3-4

23
Basics of market adjustment

• The demand function demand plans at different
  price levels

price
D
D
quantity

• Consumer demand
• D f (own price, other prices, incomes,
  preferences)
• Producer demand (derived demand)
• D f (own price, output price, productivity,
  price/quantity of other inputs)

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Basics of market adjustment (contd)

• The supply function supply plans at different
  price levels

S
price
S
quantity

• Supply (intermediate or final product)
• S f (price, input prices, technology)
• Supply (factor of production)
• S f (price, preferences for income)

25
Basics of market adjustment (contd)
Price elasticity of D or S ?Q / ?P
Significance of Epd -1
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Basics of market adjustment (contd)
Elasticity of D or S wrt parameter X ?Q /
?X (nb ? in D or S of one good wrt ? in price
of another cross-price E)
27
Basics of market adjustment (contd)

• The determination of market price
• buyers (demand) and sellers (supply) interact
  through trade
• S ?
• Shortages (DgtS) ? P ?
• D ?
• S ?
• Surpluses (SgtD) ? P ?
• D ?
• Equilibrium (DS) ? P ?

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Basics of market adjustment (contd)
price
excess S
S
P2
P
P1
D
excess D
quantity
Q
Demand and supply interaction/market equilibrium
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Basics of market adjustment (contd)
Ss

price
SL
P2
P
P
D
D
Q
quantity
Q
Demand - supply adjustment comparative statics
vs. dynamics
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Property market adjustment
S
Short-run adjustment across locations following
increased office demand in city X (nb long-run
supply response follows)
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Property market adjustment (contd)
Short-run adjustment across property types
following increased office demand (nb long-run
supply response follows)
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Property market adjustment (contd)
S
S
Short-run adjustment across legal interests
following increased demand for investment
property (nb long-run supply response follows)
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Property market adjustment (contd)
Ss
Q1
Comparative statics SR and LR equilibria
Dynamic adjustment response lags
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Property markets effective demand and supply
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(Property) market adjustment summary

• Some conclusions
• demand and supply plans driven by different
  factors
• demand and supply analysis helps us to model
  market process and suggests empirical questions
• concept of market equilibrium indicates market
  tendency
• dynamic adjustment path is of interest
• time-scale of adjustment is of interest
• price determination driven by effective D/S, but
  influenced by underlying D/S

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Lecture 3 The economic context of property

• Main topics
• definition and measurement of the economy
• explanations of macroeconomic equilibrium
• economic growth and the business cycle
• implications for real property
• Basic references
• Sloman and Sutcliffe (2001) ch 25
• Sloman (2000) chs 13-14
• Ball et al (1998) ch 6
• Fraser (1993) chs 26-28
• Harvey (1996) ch 20

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Measuring the economy

• Gross domestic product (GDP)
• the value of output produced within the country
  over a 12-month period
• 3 approaches to measuring GDP
• product method sum of values of final
  goods/services produced (also sum of value
  added in all production of goods/services)
• income method sum of factor incomes generated
  from production of goods/services
• expenditure method sum of expenditures on final
  goods/services

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The circular flow of national income and
expenditure
(1) Production
(2) Incomes
(3) Expenditure
39
Measuring the economy (contd)

• Some variants on measuring the economy
• GDP at market prices standard method of
  reporting GDP, includes taxes minus subsidies
  on goods/services
• GDP at factor prices measurement of GDP
  excluding taxes minus subsidies on
  goods/services
• GNI (or GNY or GNP) GDP plus net income from
  abroad
• NNI (or NNY) GNI minus capital depreciation
• Allowing for inflation
• Nominal GDP GDP at current prices
• Real GDP GDP at constant prices (adjusted for
  inflation)
• Real GDPt Nom GDPt x price indexb/price indext

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Measuring the economy (contd)

• Adjusting for population size
• GDP per capita
• GDP per head of employed population
• Adjusting for international comparison
• GDP expressed in a common currency
• GDP at purchasing power parity

41
Measuring the economy (contd)

• Problems/limits of conventional measures
• exclusion of non-marketed goods/services
• exclusion of underground economy
• exclusion of human costs of production (eg loss
  of leisure, stress, etc)
• exclusion of externalities (eg environmental
  effects, etc)
• inclusion of goods/services produced in response
  to bads
• exclusion of income distribution
• overall poor indicator of societal welfare
• Alternative measures
• index of sustainable economic welfare

42
Fluctuations in UK economic growth (nominal GDP)
43
ISEW 1950-96 (maximum 100)
UK
Netherlands
USA
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Macroeconomic change and equilibrium

• Understanding drivers of change
• GDP measures allow us to describe state of
  economy
• macroeconomic theory allows us to explain state
  of economy (and its expansion or contraction)
• in national accounting terms, output must equal
  expenditure
• however, in terms of macroeconomic behaviour,
  planned output need not equal planned expenditure
• planned E gt planned O ? economy expands
• planned E lt planned O ? economy contracts

45
Macroeconomic change and equilibrium (contd)

• Revisiting the circular flow of income, by
  definition
• output expenditure Y C I G X
• income Y C S T M
• therefore I G X S T M
• or injections(J) leakages or withdrawals
  (W)
• Economy is in equilibrium if
• injections leakages (by definition they must)
• and planned injections planned leakages
• Impetus for growth or contraction of economy is
• unrealised plans
• changes in plans

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The circular flow of income
INJECTIONS
Export expenditure (X)
Investment (I)
Government expenditure (G)
Consumption of domestically produced goods and
services (Cd)
Factor payments
BANKS, etc
GOV.
ABROAD
Import expenditure (M)
Net taxes (T)
Net saving (S)
WITHDRAWALS
47
Deriving equilibrium national income
Cd, W, J
W
x
J
O
Ye
Y
48
Macroeconomic change and equilibrium (contd)

• There are constraints on size of economy
• resources
• technology
• institutions
• Constraints and their effects can be examined in
  terms of
• aggregate demand total planned expenditure
  (CIGX-M)
• aggregate supply total output of goods/services
  income
• equilibrium where AD AS

49
Aggregate demand and aggregate supply
AS
Price level
P2
P1
AD2
AD1
O
Y1
Y2
National output
50
Macroeconomic adjustment through time

• The development of GDP
• long run growth in nominal and real terms
• GDP is cyclical (the business cycle)
• institutional dimension (eg political business
  cycle)
• in most periods economy functions below full
  (employment) capacity
• Causes of the business cycle
• economic growth creates capital investment
• economic growth creates resource shortage /
  higher prices
• growth slows and capital investment stops
• economic decline creates resource surplus / lower
  prices
• demand increases and replacement investment
  resumes
• economic growth resumes

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Fluctuations in UK economic growth (nominal GDP)
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The business cycle
Potential output
Trend output
National output
Actual output
O
Time
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Property and the economy

• Relationship of real property to the economy
• housing is a significant aspect of consumer
  spending
• non-residential property facilitates production
• letting of property (business and domestic) 20
  of GDP
• new construction is a major component of capital
  investment
• construction 5 of GDP
• importance of property as asset base
• Expectations of relationship
• growing economy will generate requirements for
  property
• correlation of returns to property and other
  assets
• imperfect correlation of business and property
  cycles due to lags in property provision