Real Estate Economics - Assignment Example

Real e economics: Introduction: The real e industry is engaged in leasing, renting, selling of real e and buying real e on behalfof others. The real estate industry comprises of the owners of the estates, the users who are the consumers, the developers who build, the renovators who refurbish buildings and the facilitators who enable sale of real estate, the facilitators comprises the financers example banks, the brokers and lawyers. According to July statistics this year the industry employs over 2125 thousand and the hourly wage rate is estimated to $16.37. This paper discusses the real estate industry on the basis of demand, supply, elasticity of demand and supply, wage rates and wage inequality, how monetary and fiscal policies affect the industry and how the economy affects the industry. Demand: The demand of houses will depend on a number of factors, one of the major factor that affect the demand of houses is the population size and population growth, other important factors that determine the demand of houses in the real estate industry include the price, the income, availability of credit and consumer preferences. When prices are low then the higher is the demand, when the income is high then the demand for housing will be higher and finally when there are available credit services then the higher is the demand for houses. Population size and growth is the majo0r factor that determine the demand for houses in an economy, the higher the population size then the higher the demand in the real estate industry. The income elasticity of demand is a measure of the responsiveness of demand as a result of a change in the consumer income, De Leew (1971) undertook a study in North America to determine the income elasticity for demand for houses, according to him he estimated the income elasticity of demand to be between 0.5 to 0.9, this means that the income elasticity of demand in the real estate industry is inelastic whereby the proportion change in income is greater than the proportion change in demand, however an increase in income will lead to an increase in the demand for houses. The price elasticity of demand is the responsiveness of demand to a change in price, Polinsky and Ellwood (1979) undertook a study in north America aimed at determining the price elasticity of demand, the price elastic of demand was estimated to be negative 0.7, this figure means that an increase in the price for houses will definitely lead to a reduction in the demand for houses. Supply: The supply in the real estate industry will depend on a number of factors, the supply of houses depend on the cost of inputs, the stock of houses available in the economy and the existing technology , production of houses will involve factors such as land, labor, material cost and other costs involved in production. A study undertaken in North America showed the following costs: From the above chart it is evident that the highest cost is material cost and the second highest cost is labor cost, lower costs are incurred due to financing and acquisition costs, for this reason therefore the production function for housing is estimated to be a function of labor, land and material costs. Price elasticity of supply: George Fallis (1982) estimated the price elastic of supply to be 8.2 which is quite high, however it was also evident that the short run price elasticity was quite higher than the long run price elasticity, the price elasticity of supply in the housing industry will depend on the elasticity of substitutes and supply restrictions in the economy. Therefore from the value of price elasticity it is evident that an increase in price by one unit wil increases the supply of houses by 8.2 units. Externalities in the real estate industry: Externalities are the unpaid for loss or gain resulting from the production in the industry, the unpaid for gains are the positive externalities and the unpaid for loss is said to be a negative externality, in the real estate industry the negative externality include pollution of the environment and also littering and degrading the environment through extraction of natural resources and disposal of waste. Negative externalities in this industry include pollution; pollution is a negative externality that results from the industry as a result of building houses, this negative externality include noise pollution by machines, air and environmental degradation resulting from the construction of houses. Despite the many negative externalities resulting from the real estate development there are positive externalities gained, these positive externality include the provision of housing to the population in the economy, and the real estate provides affordable housing to the population and therefore produce positive externalities. Wage inequality: The real estate industry comprises of the owners, the developers who build, the renovators who refurbish buildings and the facilitators who enable sale of real estate, the facilitators comprises the financers example banks and lawyers and brokers, all these individuals have different wages depending on their specialty, the following chart summarizes the wage rates of than different participants in the real estate industry: From the chart it is evident that the brokers are the highest paid individuals in the industry, rental clerks are the lowest paid individuals in the industry, therefore there are wage inequalities in the industry determined by the specialty of the individuals in the industry and also this also depends on the geographical region. Monetary and fiscal policies: Monetary policies are those policies that use interest rates and money supply to adjust the economy, fiscal policies are those policies used by the government to adjust the economy and the tools used include government spending and government taxation. These policies affect each and every industry in the economy and therefore the real estate industry is no exception. A monetary policy that increases interest rate will affect the real estate industry, interest rate is the cost of borrowed funds, as earlier discussed the demand for houses depend on a number of factors and one factor is the availability of credit and also cost or price, when interest rates are increased then the cost of financing is high and therefore the cost of housing rises, as a result of the increase in interest rates the demand for houses declines affecting the housing industry negatively. A decline in interest rates will lead to an increase in the demand for houses and therefore this will positively affect the housing industry. Finally regarding the monetary policies it is evident that an increase in money supply may lead to inflation and inflation means an increase in prices of goods, when the price of goods increase the price of houses increase and this definitely reduces the demand for houses. A fiscal policy that increases taxes on goods and services will affect the real estate industry, taxation increase means that the cost of production will increase as a result of increase in price for the inputs, as a result of this increase in inputs the price of houses rise, on the other hand a reduction in taxation on inputs used in the housing industry will bring the cost of production down and this will result into increased demand for houses. Government spending will also affect the real estate industry, the government may subsidies the inputs used in the housing industry as a way of boosting the industry, and this will result to more affordable houses in the economy and therefore help in the development of this industry. Therefore both fiscal and monetary policies will affect the real estate industry either in a negative or positive way. Economy and the success of the Real Estate: The economy will affect the real estate industry, the current state will affect the economy example when the economy is experiencing a depression, high inflation or in a recession. High inflation in the economy will tend to increase the cost of inputs in the industry and therefore prices of houses in the industry will rise. Low interest rates in the economy will positively affect the industry whereby there will be low cost of capital to purchase houses and therefore higher demand in the industry. Low labor cost will also positively affect the economy where low labor costs will reduce the cost of production and therefore low prices resulting to an increase in demand for houses. The availability of credit will also benefit the real estate industry. This is due to the availability of funds to finance the building and also the purchase of these houses, therefore the economy will definitely affect the industry. The level of employment and income levels of individuals in the economy will affect the economy, when the income is high and more individuals can afford houses then there is a high demand for houses. However in cases where there is a market bubble the situation is different, a market bubble in the real estate economy is the rise in price that cannot be attributed to any input and there is a rise in prices of houses in the economy, the result of the market bubble is a market bubble burst where the price of assets falls to near zero within a very short period, this negatively affect the housing industry and mostly results from speculation. How the economy negatively affect the industry: There are those factors that will hamper the development and success of the real estate industry, this include high labor cost, high interest rates, high cost of inputs including building materials, an increase in government taxation, inflation and competition from substitutes, therefore policies will affect the industry and it is the role of the government to ensure the success of the industry through the interference with the free market to achieve desired growth and development in the economy. Conclusion: From the above discussion the real estate industry provides employment to over 2125 thousand workers, therefore it is a major source of employment in the economy, this industry has a number of participants who include the owners, the consumers, the developers, the renovators and the facilitators. It is also evident that the industry price demand elasticity is -0.7 and that the supply price elasticity is 8.2 which are relatively high compared to other industry. There are various economic occurrences that affect the industry and this include wage rates, cost of inputs, inflation, interest rates, taxation by the government, government spending and money supply in the economy. It is also evident that the demand for houses depends highly on the population size and the population growth rate. References: BLS (2008) the Real estate industry wage rates and employment, retrieved on 12th November, available at http://stats.bls.gov/iag/tgs/iag53.htm De Leeuw F. (1971) The demand for housing, A review of the cross-sectional evidence, Review of Economics and Statistics, volume 53, no. 1, pp. 1-10. Marc Weiss (2002) the rise of the Community builder, McGraw Hill publishers, New York George Fallis (1985) Housing Economics, Butterworth publishers, Toronto Kain F. and Quigley M. (1975) Housing Markets and Racial Discrimination, National Bureau of Economic Research publishers, New York Phillips Hardwick (2002) Introduction to modern economics, McGraw Hill publishers, New York Polinsky and Ellwood (1979) an empirical reconciliation of the demand for housing, Review of Economics and Statistics, volume 61, pp. 199-205 Stephen Roulac (1999) the Real estate industry, McGraw Hill publishers, New York Read More