CHAPTER2BASICREALESTATEECONOMICS.pdf

CHAPTER 2 BASIC REAL ESTATE ECONOMICS INTRODUCTION REAL ESTATE DEMAND REAL ESTATE DEMAND CONCEPTS DEMAND SENSITIVITY TO PRICE/RENT CHANGES: PRICE ELASTICITY OF DEMAND Impact of Actual Price Changes vs Expected Price Changes EXOGENOUS DETERMINANTS OF REAL ESTATE DEMAND MEASURING CHANGES IN REAL ESTATE DEMAND: ABSORPTION CONCEPTS THE SUPPLY OF REAL ESTATE REAL ESTATE SUPPLY CONCEPTS The Long-Run Aggregate Supply: Is it Relevant? The Short-Run Aggregate Supply New Construction NEW CONSTRUCTION BEHAVIOR What Determines New Construction? REAL ESTATE PRICE ADJUSTMENTS PRICE DETERMINATION MECHANISM LONG-RUN VS SHORT-RUN PRICE ADJUSTMENTS THE STOCK-FLOW MODEL: A FORECASTING TOOL ASSESSING DEMAND-SUPPLY IMBALANCES DEMAND-SUPPLY INTERACTIONS: MARKET INEFFICIENCIES ASSESSING THE EXTENT OF DISEQUILIBRIUM: POPULAR/SIMPLISTIC MEASURES Construction Minus Net Absorption (C-AB) Nominal Vacancy Rate (V) ADVANCED MEASURES/METHODOLOGIES Nominal vs Structural Vacancy (V-V*) Prevailing Rent vs Implicit Equilibrium Rent (R-R*) CHAPTER SUMMARY QUESTIONS REFERENCES AND ADDITIONAL READINGS - 30 - INTRODUCTION Urban real estate markets may be peculiar and idiosyncratic in a number of respects, but they still obey some basic economic principles: the principles of demand and supply. In what follows, we are going to elaborate on some basic/generic demand and supply concepts and demonstrate how they determine market prices. The premise is that supply and demand frameworks provide basic analytical tools for conceptualizing the workings of urban real estate markets. As one of the readings by a down-to-earth practitioner suggests, these simple principles have been ignored by the real estate industry in favor of boilerplate analysis or simple hunch and intuition (Featherstone, 1986). Hunch and intuition may be useful when they are based on a solid understanding of how markets generate opportunities and constraints. However, such an approach may be very misleading when it is based on a myopic interpre