Real Estate Economics

Real estate economics is a branch of study that focuses on applying economic principles to housing and property markets. It studies the housing sector from an investment perspective, the effect of real estate values on investment decisions and the economy from a broader viewpoint. 

The branch of economics shows the patterns of supply and demand, along with the price pattern in the market. The study sheds light on areas of real estate, such as expectations of residential real estate markets and the impact of uncertainty. It also reveals the borrowing constraints associated with the real estate markets.  

Real estate economics is the study that uses micro and macroeconomic principles to understand the national and regional trends in real estate values. This branch of economics helps in understanding the causes of fluctuations in real estate activities and how changes can affect the real estate market. This is a reflection of the future state, and hence, the field is studied from both investment and policy perspectives.  

The main participants in the market are owners, who could be tenants and users or investors. Consumers (renters), developers, renovators and facilitators (real estate brokers). The owners and renters are responsible for the demand, and developers and renovators are responsible for the supply in the market. However, certain characteristics such as durability, heterogeneous factors, transaction cost, time delay etc, can greatly influence market dynamics. 

The real estate part of the market economy could occupy a significant space in a nation's economy. The financial performance of real estate economics is the driver for growth in the sector and investors and developers are often influenced by the activities in the market. Careful study of the influencing factors can help investors make good choices of investments. It helps the owner's and tenants' money to good use. Developers and renovators can identify prospective areas to shift focus and create demand. Furthermore, governments can introduce policies that could suppress or encourage positive actions.  All positive actions are expected to give favorable results for the economy. 

Given below are the characteristics of real estate economics 

#1 - Durability  

Durability describes the estates' ability to last. The rate of supply in an area, existing stock, rate of deterioration and rate of renovation are all important criteria in determining the durability of the property. The flow of new developments during the present period is also an influencing factor.   

#2 - Heterogeneous factor 

Every piece of property is unique. This can be attributed to its location, building terms, financing, etc., which creates variations in pricing. Subcategories such as commercial, industrial and residential properties divide the properties even more, and hence, pricing is challenging.  

#3 - Transaction costs 

Various fees and charges are involved in buying or moving into a property. These include search costs, real estate fees, moving costs, land transfer fees, maintenance charges, legal fees, and registration fees. These costs also influence the prices of a property.  

#4 - Other characteristics

Other factors, such as time delays, whether the property is used for consumption or investment, the immobility of the locality, etc., also influence the pricing of the property. 

Let us look at some of the examples to understand the concept better.

Example #1

Suppose ABC Housing Ltd is a real estate development company that has just begun its business in a village called XYZ. The village is experiencing a growth spurt, and the demand for residential plots is increasing due to its proximity to a city. The city is, however, crowded and polluted. XYZ, however, offers transportation and a pollution-free environment. The company decides to build a residential community in the village to attract investors and tenants.   

ABC would look at the acquisition cost of lands to start the project. This would depend on the location, distance from the city, the availability of transport and the safety of the area. There could also be other criteria that the outside people would prefer before moving in. Similarly, the construction costs have to be analyzed based on the terrain and the material and labor charges. This would indeed boost employment in the region.

Similarly, if the project is viable and has the potential to make money, investors would invest some money. Alternatively, ABC could also opt for bank loans, which again would positively contribute to the country's economic activity.  If there is high demand and less supply (without any competitors), ABC could provide the houses for cheap prices and still make a profit. This also depends on the surrounding areas and the facilities offered by them.  

The whole picture gives us a glimpse into what actually happens inside real estate sectors. 

Example #2

The article talks about the macroeconomic indicators that determine the demand for properties and the management of investment risks. Top economic indicators include inflation indicators such as CPI, or the consumer price index, PCE or personal consumption expenditure, and PPI or the producer price index.  These reflect the inflation in the market. This is because inflation is an indicator of the cash flows, revenues and expenses of properties in commercial real estate economics.  Interest rates and stock market performances can also be indicators of real estate activity. Similarly, there are industrial real estate economic indicators and retail, office and multifamily estate indicators. This shows us that the sector has further branches of study and a lot of indicators to understand the market. 

Given below are some of the points that highlight the importance of the economy of real estate 

• It drives economic expansion. 
• It helps investors make better investment choices and make better returns.  
• It helps investors and all related parties understand the risk associated with the general real estate market. 
• It helps the government formulate policies that can make the sector perform better. 
• The insights could help the government in rural and urban planning.  
• It can give governments and companies valuable information about consumer choices. 
• Real estate economics and finance are considered significant parts of individual and business growth, as they are considered a basic ingredient for survival and employment.  
• It is a significant source of income tax for the government.  
• It contributes to the country's gross domestic product (GDP), which fuels investments and employment opportunities.  
• Significant growth in the sector can attract foreign direct investments in it or related sectors, as permitted by different geographical jurisdictions. 
• The reports of the real estate sector could be used as an economic indicator of growth.