1 Real Estate Economics Mbc Dec11.Pptx

REAL ESTATE ECONOMICS

by Maya Bandolon-Cartojano, REC, REA, REB

PHILIPPINE ASSOCIATION OF REAL ESTATE BOARDS, INC (PAREB)

Gensan-Sarangani REB

A. Basic economic conceptsB. Real Estate economics 1. Market characteristics 2. Demand 3. SupplyC. Real Estate Broker's RoleD. Forecast Variables 1. Residential housing construction 2. Macroeconomic trends a. Inflation Rate Movements b. Interest Rate movements c. Foreign exchange rate movements

TOPIC COVERAGE - 4hrs

Real Estate Economics by MayaCartojano REC, REA, REB

3. Government Macroeconomic Policies (fiscal policy, monetary policy, physical policy - housing & urban development programs, energy & environment programs

E. Factors affecting real estate valueF Philippine Real Rstate Economic TrendsG. Current events

5 April 20152

What is economics?● The study of human interaction● The study of scarcity● The study of resource allocation● The study of production and consumption

BASIC ECONOMICS

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 20153

Needs – things that are necessary for survival

FOODCLOTHES

HOUSING


BASIC ECONOMICS

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Wants – things not necessary for survival but that add comfort and pleasure to our lives


BASIC ECONOMICS

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Personal resources – time, money, skills we use to satisfy our wants

Economic resources – the means through which goods and services are produced

Natural resources – raw materials supplied by natureHuman resources (also called labor) - people who work

to produce goods and services.Capital resources (or capital) – the tools, equipment, and

buildings that are used to produce goods and services


BASIC ECONOMICS

RESOURCES

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The basic economic problem

is

because we have limited resources but unlimited wants.


SCARCITY

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You have to make a choice. You have P200 and have been invited to a movie with a friend but you also want to buy a new book of your favorite author. You are also trying to save for Palawan trip during Christmas break.

What do you do?

Opportunity Cost: The next best alternative – what a person gives up to

get something.


BASIC ECONOMICS

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● Macroeconomics: study of the national economy and its segments including national income, output, employment, and growth.

● Microeconomics: study of individual firms and households.


TWO CATEGORIES OF ECONOMICS

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Real EstateEconomics

General EconomicsPrinciples

and Theory

Real EstatePrinciples

and Practice

A study of people & how their actions affect property values.

• Study that uses economic principles• Micro and macro analysis• Analyzes trends • Considers supply and demand • Links general economic theory and real estate practice


WHAT IS REAL ESTATE ECONOMICS?

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Basic Economic Principles

Government’s Role in the Economy

Real Estate and the National Economy

Final Real Estate Decision

Investment Analysis

Taxes, Land Usage, and Environmental Controls

Real Estate Market Analysis

Regional and Community Analysis


STAIRWAY OF REAL ESTATE ECONOMICS

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Residential Real Estate Markets

Real estate economic characteristics1. Fixed supply in short run2. Immobile-Local market is

key3. Long economic life4. Lack of standardization

Key Concept:Short term movements in prices and rents caused by changes in demand, not in supply.



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What is a “market”?

● A place where buyers and sellers meet to exchange items of value.

● Competition varies directly with:● Number of buyers ● Number of sellers● Homogeneity of units available● Knowledge by all parties vs. advantage over the

other party to distort price or market activity



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Characteristics of the Real Estate Market

● Buyers & sellers are not numerous● Local nature of the market● Number of buyers/sellers for a particular

class of property is usually limited● Number of buyers/sellers is small in

comparison to other commodities



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● Real estate is heterogeneous, bulky, expensive● Each property has a different location

that is permanently fixed● Combined land, capital & financing is unique

● Soil, topography, climate unique



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● Buyer/Seller knowledge is frequently poor due to● Infrequency of entry into the market● Limited number of comparable bids and offers● Complexity of legal requirements needed to

transfer ownership



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● Willingness of buyers/sellers impaired due to● Limited supply of real estate● Limited number of buyers and sellers● Limited financing options for particular

properties● Differences in compulsion to buy by

individuals



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● Supply of land is fixed● Land is fixed = fixed supply● Housing units (density) may be increased

● Construction time● Average of 2 years to increase/build

units● Short run: supply limited● Long run: supply may be increased



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Rents and Prices: Real Estate Demand Curve

Quantity or Space

Price or Rent

As Price Decreases, Quantity Demanded

Increases& vice versa


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0

P5M

P4M

P3M

P2M

P1M

500 1000 1500 2000 2500

Real Estate Demand● Increase in Demand caused by

● Population● Income● Cost● Government action


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FORECAST VARIABLES RESIDENTIAL HOUSINGDEMAND VARIABLES1. PopulationNumbers, Owner Occupied, Demography,

Renters2. IncomeEconomic base trends and employment,

Disposable income trends, Discretionary income for speculation and investment

3. CostsCost of household operation, costs of transport


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FORECAST VARIABLES RESIDENTIAL HOUSINGDEMAND VARIABLES4. CreditInterest rates, Loan-to-value ratios, Payback

periods. Borrower qualifications5. Other Factors: Tastes and CustomsSingle family vs. condominiums, Rent vs. buying


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Real Estate Supply

●Land is fixed●Number of housing units on

land is not fixed.●Increasing supply takes a long

time.


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Short Run & Long Run Supply Curves

Quantity or Space

Price or Rent Short Run

Supply Curve

Long Run Supply Curve

Long Run Supply Curve is more ElasticReal Estate Economics by MayaCartojano

REC, REA, REB5 April 201525

0

P5M

P4M

P3M

P2M

P1M

500 1000 1500 2000 2500

Real Estate Supply● Increase in supply is caused by:

● Construction● Conversion● Demolition● Destruction


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Forecast Variables Residential Housing

SUPPLY VARIABLES1. Rate of New Construction● Construction Cost● Land Availability● Credit for Construction● Demand for Housing2. Rate of Conversions● Interest rates● Economic base trends● Environmental Constraints

● Coastal controls, Building moratoriums sewer and water

● Planning controls● Zoning, Building codesReal Estate Economics by MayaCartojano

REC, REA, REB

3. Rate of Demolitions● Number of

existing housing units

4. Rate of Destructions● Manmade● Natural

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Assuming a decrease in demand, supply will change:

● As demand falls, vacancies increase● Increased vacancies lead to fall in

rents/prices● More space available at lower cost

● Long term effects of rent/price decrease:● Out-of-pocket costs for least desirable

property● Costs exceed income generated● Abandonment or demolition


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Real Estate Supply is Fixed in the Short-Run

Demand

PriceSupply

Quantity

Rents and Prices change with shift in Demand


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0

P5M

P4M

P3M

P2M

P1M

500 1000 1500 2000 2500

Compare Price/Rents when Demand changes with Fixed Supply

Supply

Demand

Equilibrium

Price

QuantityShort term price changes caused by demand

Fixed Supply

DemandLower Demand

Price

QuantityDecrease in Demand equals Decrease in Price

Old

Price

Quantity

Fixed Supply

Higher Demand

Demand

NewIncrease in Demand equals

Increase in Price/Rent


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Price

Quantity

Old Supply

New Supply

Old Supply

New Supply

Old Price

New Price Same

Demand

Increase in Supply when Demand remains same will lower Price or Rent “Over Building”

Supply * Demand


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If there is an increase in demand

● Increased demand reduces vacancies● Reduction in vacancies increases rents and

prices bid for short-term fixed supply● Those who cannot afford higher rents/prices:

● Share space with others● Move to less expensive property● Increase density and intensity of use


5 April 201532

Inevitable Real Estate Cycles● Characteristics of Real Estate that leads to cycles:

● Large economic and physical size

● Need for debt

● Government regulation

Typical Real Estate Cycle

Construction begins and

accelerates as you move up the curve

while vacancy continues to

decline

Vacancy declining and no construction

Vacancy increases yet construction

continues unable to stop

Vacancy increases at a decreasing rate, some construction


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If there is a decrease in demand

● Increased vacancies● Decline in rents and

prices● Lower rents/prices

leads to:● Moving up to higher

price area● Reduced density


5 April 201534

Assuming an increase in demand, supply will eventually change:

● Profit motive: Demand pushes rents & prices up

● Construction increases (if no growth limits)● Supply overtakes increased demand,

vacancies increase● Vacancies lead to falling rents and prices● Lower rents/prices:

● Difference between building costs/rents/sales narrows

● No longer profitable to buildReal Estate Economics by MayaCartojano


Rent controls● Rents are high because demand exceeds

supply● To rebalance the market:

● Demand must decrease● Supply must increaseRent controls tend to:

• Increase demand by keeping rents low

• Decrease supply by maintaining low rents

• Low returns for investors reduces construction

• Usually politically motivated


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● Imperfect market compels buyers and sellers to use a real estate professional

● Professional has higher knowledge of legal and technical aspects

Real Estate Market



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Real Estate Broker’s Role● Client/customer rely upon brokers expertise● Be a knowledgeable, ethical broker help

overcome market imperfections:● Updated on increase/decrease in demand & supply● Updated on market trends and transaction details

● Awareness of rents/prices● Advice on available types of profitable

investments● Lead principals through legal complexities

● Give financing sources and alternatives


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Real Estate Sub Markets● Occupancy – The desire to receive direct

services from the property● Investment – The desire to receive services in

the form of a profit● May be non-monetary rewards● Prestige/pride of ownership


5 April 201539

Supply and Demand❑ The Real Estate Asset Market (Property Market)

SupplyInvestors

Wanting to Sell

Demand:Investors

Wanting to BuyMarket

DEVELOPERS BUYERS


5 April 201540

LESSORS

SupplyProperty Owners

(Landlords)

Demand:Property Users

(Tenants)Market

❑ The Space Market

LEASEES

Supply and Demand


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Real Estate Market

Investment

Occupancy

Residential

Commercial

Office

Industrial

Residential

Commercial

Office

Industrial

Own Rent

Own Rent

Own Rent

Own Rent

Own Rent

Own Rent

Own Rent

Own Rent

1-4 Family

Multi-Family

1-4 Family

Multi-Family


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5 April 201543

MACROECONOMIC TRENDS AFFECTING REAL ESTATE VALUE

REAL ESTATE SUPPLY FACTORSo Housing Supplyo New Construction Activityo The Supply of Vacant Land

REAL ESTATE DEMAND FACTORo Populationo Purchasing Power


5 April 201544

MACROECONOMIC TRENDS AFFECTING REAL ESTATE VALUE

NATIONAL GOVERNMENT ACTIVITYo Housing and Urban Development Programso Energy and the Environmento Government Banking and Monetary Policieso Fiscal Policies

o Physical Policies


5 April 201545

FACTORS AFFECTINGREAL ESTATE VALUE

PHYSICAL FORCES o Natural Resources o Developed Resources

SOCIAL FORCESo Family size and age-group distributiono Neighborhood stability and attitudes about propertyo Population growth, decline, or shifts at the community, regional and national levelso Life-styles and living standards, often combined with other forceso Attitudes about law enforcement, the role of government and individual responsibilityo Attitudes about development, growth and ecologyo Attitudes toward public education


5 April 201546

FACTORS AFFECTINGREAL ESTATE VALUE

POLITICAL FORCESo Zoning and land-use regulationso Building and safety regulationso Environmental protection lawso Police, fire and health protection serviceso Crime preventions, education and recreation serviceso Public works; power, water, transportation, sewers and flood controlo Fiscal policy and taxationo Monetary policy and controlso Government-sponsored urban redevelopment and housing finance programso Regulation of industry and business


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CONCERNS FOR BOTH SUPPLY AND DEMAND

IMPACT OF INFLATION1. Actions of BSP Reserve2. Speculators seeking gains3. Rates of returns4. Fiscal policy of

government5. Property and income taxes

IMPACT OF ENERGY SHORTAGES1. Transportation: Number of

highways and cost of travel2. Utility rates3. Size of homes


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Fiscal PolicyRelated to budget,

government expenditure, taxation

Physical PolicyRelated to overcoming

specific problems of the economy

Monetary PolicyRelated to money

supply, exchange rate control and bank rate

control

Macroeconomic Policies

Fiscal Policy

Use of “Government Expenditure”, and “taxation” to manage the economy.

Variables affected by Fiscal Policy in the economy

➢Aggregate demand and the level of economic activity ➢The pattern of resource allocation➢The distribution of income.

Purpose of Fiscal Policy

Stabilise economic growth, avoiding the boom and bust economic cycle


BIR: Income Taxes Tariffs -Import Taxes & DutiesDBM: Budget Management Fiscal Spending Governement Loans & Payments

50

Physical Policy

Meant to affect only strategic points of the economy

Variables affected by Physical Policy in the economy

➢Price and distribution of specific commodity➢Investment and production➢Foreign Trade

Purpose of Physical Policy

Overcome specific problems such as pricing of particular commodity, shortages or surpluses developing in the economy etc.


Price QuotasPrice Ceilings/ FloorLabor Laws/RatesSubsidiesProduct Bans

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Fuel PricesInflation RatesInterest Rates

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Monetary Policy

Regulation of supply of Money and Cost and Availability of Credit in the economy

Variables affected by Monetary Policy in the economy

➢Interest Rates➢Liquidity➢Credit Availability➢Exchange Rates

Purpose of Monetary Policy

Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth


Interest RatesSavings Available Credit

Market Activity

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Target Variables -Inflation

-Interest rate

-Real GDP

-Employment

-Consumption

-Savings

-Investment

Policy Variables - Money supply- Liquidity conditions

- Inflation

Monetary Policy – Influence


Policy Instruments Discount Rates (loan fr BSP)- Interest Rates (loan to clients)

- Reserve Requirements

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INTEREST RATES - Availability of credit influences RE

Development and RE Market

Available Credit/LoansMore active market

More RE DevelopmentMore RE Buying

Interest RatesSavings

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LendingPublic Spending

RE BuyingBusiness Investments

Interest RatesSavings

MONETARY POLICIES

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Compare Current Market Indicators

● Number of deeds recorded● Number of loans: conventional, DVA, FHA● Foreclosure rates● Trends in rents and resale prices● Building permits/subdivision activity● Construction costs● Vacancies (utility company; change of address)● New home inventory● Classified section activity● MLS, including price changes● Local population trends● Government housing support programs


5 April 201556

Boost Economy after 2001 Slowdown / dotcom bubble

Stable IR from 2004 to 2006

Rise in IR to control liquidity, due to Heavy Capital Inflow &

to curb RE Appreciation

IR hikes to curb inflation

IR Cuts to boost Economy

Interest Rates Movement


http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/

Uncontrolled Inflation despite Further IR hikes

IR hikes proved to Be effective

To curb Inflation

Inflation Down on account of global credit crunch

Inflation Movement




Interest Rates Movement

Banks to make available more funds& More Efficiency


Market Driven

Controlled

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Sterilization to Control pesoAppreciation

Exchange Rate Movement


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ADVANTAGES OFREAL ESTATE INVESTMENT

CASH FLOW = PASSIVE INCOME


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RENTAL YIELD is more than

BANK SAVINGS RATE

MORE INCOME


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LEVERAGE(CAN BE USED AS

COLLATERAL)

BANKReal Estate Economics by MayaCartojano



HEDGE AGAINSTINFLATION

INFLATION


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INFLATION VS.CAPITAL GAIN RATE


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FLEXIBILITY /EXPANDABILITY


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DEPRECIATION(HEDGE VS TAX)

TAX


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POWER OF AMORTIZATION


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ADVANTAGES OF

REAL ESTATE INVESTMENT

PREDICTABILITY/CONSERVATIVE


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LIFETIMEINVESTMENT

NEW COUPLE

YOUNG FAMILY

MID-LIFE STATUS

RETIREMENT

SINGLE STATUS

Different Lifestyles, Life Cycles, Personal Goals, Levels of Wealth

LEGACY


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Gross Rental Yields - Philippines Compared to Continent

10.99%


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House Price Changes, 5 Yrs (%) - Philippines Compared to Continent


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1 Real Estate Economics Mbc Dec11.Pptx

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