Above that trigger point, extra supply is subject to a rising supply price because of diminishing returns in the construction industry. The level at which replacement cost is currently set depends on land prices, as well as on construction and other development costs. Land prices are determined by supply and demand in the land market. Commercial property owners compete amongst each other, and against other land uses, for desired land sites. All the inputs to the supply process are covered in the model and equilibrium conditions are assumed to be met. Other characteristics of land economics are heterogeneity of location and use, high transaction costs, immobility, commodity that can be consumed and saved, and long term delays in the form of market adjustment process.
While there is dependence on the consumer's income to some extent, real estate is a branch of economics where the consumer is not completely dependent on his own capital. In a majority of investments, the consumer has to depend on external factors like bank finance since the cost of land and buildings is high when compared to that of other commodities. The variables that are associated with demand in land are demographic factors like size of the population and changes thereof, income elasticity of consumers, price elasticity of land/buildings, depreciation in building value, mortgage and loan rates etc. Other factors such as accessibility to roads and infrastructure, surroundings, facilities available in the vicinity too influence the demand and price of real estate in any region. Other factors that play an important role in determining the demand for land are the extent of industrialization, type of land use (commercial, residential), role of developers and land planning agencies in the area/country.
3- To what extent is government intervention in real estate markets a matter of externality management (50 marks)
The real estate market, as in any other market is governed by demand and supply of real estate and market factors. When a competitive market reaches equilibrium, the supply exactly meets the demand and prices are stable. However, in real estate economics, there are a lot of external influences, which can lead to a change in market equilibrium. Other than the consumers or owners of the property and the sellers or suppliers of the property, there are other vested interests like speculators, who can either hike up the prices or bring it down according to their own whims and fancies.
In every real estate cycle, the price of real estate slowly starts rising with rising incomes, reach a peak and then slowly start falling. Home prices cannot rise faster than incomes forever. Easy credit, lax lending standards and panic buying raise them to impractical levels. Weak borrowers also get loans. People with good credit borrow too much. Speculators too join the circus. At a particular point of time, the supply overshoots the demand and the bubble bursts. There is oversupply of housing and credit facilities, but there are no borrowers.
It is at this stage that government could start its intervention. There could be sops like a cut in the rate of finance or lending. Borrowers would be in a better position to repay their