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Efficiency in the Real Estate Market: Case of Energy Efficiency

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Title: Efficiency in the Real Estate Market: Case of Energy Efficiency


1
Efficiency in the Real Estate Market Case of
Energy Efficiency
  • Ari Laitala
  • Doctoral student

2
Efficient market hypothesis (EMH)
  • EMH, classical view of the market efficiency
    (Fama 1969, 1970)
  • Concludes that there are three different forms of
    market efficiency weak, semi-strong and strong
  • Focuses on the financial market and especially to
    the stock market
  • Focuses lot of macro-level approach
  • How about the micro level approach?
  • Probably some transactions are more efficient
    than the others?
  • What kind of buyer is efficient? (or when)
  • What kind of seller is efficient? (or when)
  • Are prices alone a relevant scope to the
    efficiency? How about the value and value/price
    ratios
  • What is actually meant by the efficiency and what
    could be the meaning of it?

3
What is efficiency?
  • Efficiency is largely used in physics,
    engineering and in economics e.g.
  • Pareto efficiency, Kaldor-Hicks efficiency,
    market efficiency
  • Mechanical efficiency measured performance /
    ideal performance
  • We define Efficient Market
  • Market is efficient if transactions in the market
    are efficient
  • (Market efficiency is a function of single
    transactions efficiency)
  • We define Efficient Transaction (Efficiency of a
    transaction)
  • Transaction is efficient if value creation of
    buyer and seller is maximised
  • (Transaction efficiency is a function of value
    creation)

4
Subjective value for the buyer (SVB)
Detected features (value factors)
Alternative consumption possibilities
-
Subjective value for pb1
Willingness to buy WTB increases
Value judgement process
Estimation of the probable price
Ability to buy ATB
Object p1
Subject pb1
5
Subjective value for the seller (SVS)
Object p1
Subject ps1
Value judgement process
Estimation of the probable price
Willingness to sell WTS increases
Alternative consumption possibilities
-
Subjective value for ps1
6
Valuing value factors
  • Object can be understood as a set of features
  • Single buyer detects some of them
  • If a subject believes that a feature has an
    capability to satisfy the needs and wants the
    feature has an effect to the subjective value
  • If a feature has an effect to the subjective
    value we define the feature as a value factor
  • Some features can be hard to value
  • Like cosiness of neighbourhood
  • Potential buyer may realize that all the relevant
    value factors are maybe not detected at all

? ?
-
7
Efficient buyer and seller
  • It is believed that buyer prefers best subjective
    value (SVB) / price ratio
  • Finding best value offer in the market causes
    transaction costs
  • According to Kotler they are
  • Financial, psychological, energy and time related
  • Accruing searching costs limit the benefits of
    finding the best value offer (value proposition)
  • Buyer is efficient to the point where increasing
    transaction costs exceed the probable benefits
    finding better value offers
  • Case of efficient seller is very same seller is
    believed to prefer highest offer and searching
    the best offer causes transaction costs as well
  • Seller is efficient to the point where increasing
    transaction costs exceed the probable benefits of
    finding higher bids

8
Value creation process
SVB
Value can be maximised in this transaction!
Value increases
SVS
MV
SVB
MV
MV
SVS
SVS
SVB
Value creation value detecting value
capturing
(finding best negotiation
power value proposition
)
9
Conclusions so far
  • The more efficient the transactions in the market
    are the more efficient the market is
  • The more efficient the buyers and sellers are the
    more efficient the transactions are
  • The more the buyers and sellers are able to
    create subjective value the more efficient they
    are

10
Case of pipe repair
11
Game of sell and buy in the suburban housing
market
Efficient buyer Average buyer
Average buyer Inefficient buyer
Pipe repair has been done in the apartment you
are buying Pipe repair has not been done in the
apartment you are buying
Pipe repair has not been Pipe repair has
been done done in the apartment you in the
apartment you are selling are selling
12
Some results of the energy efficiency survey
within Finnish professional commercial property
valuers (3/2013)
13
Some indicative conclusions related to energy
efficiency in the Finnish commercial property
market
  • Energy efficiency is quite clearly a detectable
    value factor (agreed to some extent)
  • Related to the earlier and general results
  • Energy efficiency has been very largely reported
    to have a positive effect to the market values
  • Yes, of course, but energy efficiency seems to
    have its price, benefits dont necessarily exceed
    the costs
  • Energy efficiency has an effect to the value
  • Effect to the cost based investment value is more
    significant than to the market values
  • Hereby, market mechanism seems to smooth the
    differences between subjective and objective
    values
  • Even though commercial property market is
    believed to be totally cash flow driven
  • There seems to be a possibility to make efficient
    and inefficient transactions in relation to
    energy efficiency

14
So what?
  • Does invisible hand of the commercial property
    market have enough power to speed up the market
    transformation?
  • No!
  • We are going to see more new regulation which
    highlights the pros and cons of the energy
    efficiency (sustainability)
  • It is very problematic with the existing
    buildings
  • If our real goal is to decrease CO2 emissions,
    our journey is in its beginning
  • Thanks, questions and comments
  • ari.laitala_at_aalto.fi

15
References / Further Reading
  • Maier, G. Herath, S. 2009. Real Estate Market
    Efficiency A Survey of Literature. Vienna
    University of Economics and Business
    Administration. Department of City and Regional
    Development. Saatavissa SRE-Disc
    sre-disc-2009_07
  • Quan, D Quigley, J. 1991 Price Formation and
    the Appraisal Function in Real Estate Market
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