Real estate economics

Real estate economics involves the utilization of specialised economic techniques to understand and take advantage of the real estate market. Real estate economics attempts to provide a description and explanation of how the real estate market works, while at the same time predicting the pattern of real property prices, demand, and supply. Real property economics makes use of urban economics, spatial economics, partial equilibrium analysis (demand and supply), surveys, and research.

Housing economics is related to real estate economics but operates within a more limited scope because it concentrates more on the real estate market of residential properties. Real estate economics on the other hand has a wider scope which takes into consideration various aspects such as real estate trends, and business and structural influences changing the industry and market.

Who influences real estate economy?

Because of the widely recognised value and benefits of real property, a lot of players are involved either directly or indirectly in the real estate market. And every one of these individuals in their own way influences the flow, progress, and changes that occur within the real estate market. These economic influencers of the real estate market consist of the following;

  • Owners: Property owners are an essential part of real estate economics and how it affects the real estate market. Real property owners buy and sell land for either residential, industrial, or commercial purposes. Without property owners, there would be no trading within the real estate market, that is, no demand and no supply which will lead to a collapse of the real estate economy.
  • Lessee: This refers to a tenant who rents a property with the goal of using it either for residential or business purposes. Said tenant can be either a natural person or a company who pays the landlord/owner of the property rent in exchange for the right to make use of the property for a fixed time period.
  • Investors: This refers to a category of real estate market influencers who invest funds in real property by purchasing land but with the intention of not personally making use of that property. That is, investors by real property with the aim of gaining from it but without personally making use of the land either residentially or commercially. They gain from the land by leasing it out to other parties who seek to personally use the property either for shelter or profit. There are also long-term investors who buy either commercial or residential real property with the aim of selling said property at a time when its market value has sufficiently increased – like trading shares.
  • Facilitators: Real estate brokers, valuators, banks, lawyers, pertinent government agencies (such as Land Registry) and other specially trained individuals are responsible for facilitating the trading of real estate. That is, those in this category actively influence a smooth buying, selling and transfer of real property.
  • Builders/Developers: This group of influencers are responsible for developing real property with the aim of converting them into either residential, commercial, or industrial property. Their activities tend to increase the value of real property by converting it from raw land to developed property.
  • Renovators: Those who fall under this category specialise in rejuvenating old properties by remodelling and renovating them. This activity increases the market value of an estate.

Characteristics of Real estate

  • Durability: The fact that land is durable is immutable. While a building, depending on its quality, can stand for decades and atimes centuries, the land itself can last forever. And the value of land is inheritable, passed on from generation to generation. It is due to this that real estate markets use an economic model that operates as a stock/flow market.

There’s the stock of existing buildings, and then there’s the flow of upcoming structures. Real estate stock for a given time period is determined by formerly existing stock, the deterioration of existing stock, renovation of existing stock, and finally the current period’s flow of new development.

  • Heterogeneity: Each piece of real property is unique in its own way. This uniqueness can be due to location, the structure upon the property, function of the property, the financing of the property, and so on. It is for this reason that the prices of real property can vary.
  • Long-time delays: The time it takes to design, finance, and construct new buildings can lead to a delay in the real estate market as things don’t always move fast enough to satisfy demand.
  • Immovability: Real estate cannot be moved. That is, it is fixed in a single permanent location. It can be expanded to other locations, but the property itself cannot be moved. Consumers of real estate need to move to where the property is, the property cannot be brought to them.

How to finance a purchase of real estate?

Because of the high value of real property, not many individuals possess the capability to outright own a property. A person looking to own a property can get finances from various sources, such as;

  • Savings and loan associations: They are typically locally owned and privately managed as well as state/federally chartered organizations. They accept the savings of individuals and use them to create long-term amortized loans for home purchasers. They provide loans not just for purchasing property, but also for repair, construction, or refinancing of a property.
  • Savings banks or commercial banks: These sort of financial institutions primarily accept consumer deposits, but also provide loans to their customers to help finance property acquisition or renovation.
  • Mortgage bankers and brokers: Companies or individuals that operate as this sort of institution can provide mortgage loans to applicants looking to purchase property.
  • Life insurance companies: These provide financial assistance by lending on real estate as a form of investment. Those seeking financial assistance from an insurance company can do so by applying directly to one via a branch office or by dealing with a real estate broker.
  • Governmental and other related institutions: Sometimes the government provides financial assistance to specific categories of people to purchase property. Example of such category includes war veterans (VA loan).
  • Credit unions: This is a cooperative financial institution that is made up of a group of individuals who share a common interest and have organized themselves to assist one another. Examples are company employees, religious groups, labour unions, etc.

Related Questions

Published on 7th June 2017

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