Real Estate Investing Information Blog

Real estate economics is the function of economic techniques to real estate markets. It tries to describe, make clear, and predict patterns of real estate prices, building production, and real estate consumption. The closely associated field of housing economics is narrower in scope, concentrating on housing real estate markets. Both draw on incomplete equilibrium analysis (supply and demand), urban economics, spatial economics, and finance.

Housing supply is produced using land, labor, and different inputs such as electricity and building materials. The magnitude of new supply is determined by the cost of these inputs, the price of the existing stock of houses, and the technology of production. For a characteristic single family dwelling in suburban North America, approximate percentage costs can be wrecked down as: acquisition costs 10%, site development costs 11%, labor costs 26%, materials costs 31%, finance costs 3%, administrative costs 15%, and marketing costs 4%. Multi-unit residential dwellings usually break down as: acquisition costs 7%, site improvement costs 8%, labor costs 27%, materials costs 33%, finance costs 4%, administrative costs 17%, and marketing costs 5%. Public subdivision requirements can raise development cost by up to 3% depending on the jurisdiction. Differences in building codes account for about a 2% difference in development costs. However these subdivision and building code costs usually increase the market value of the buildings by at least the amount of their cost outlays. A production function such as Q=f(L,N,M) can be constructed in which Q is the magnitude of houses produced, N is the amount of labor employed, L is the amount of land used, and M is the amount of additional materials. This production function must, however, be familiar to account for the refurbishing and augmentation of existing buildings. To do this a second production function is constructed that includes the stock of accessible housing, and their ages, as determinants. The two functions are summed elastic the total production function. On the other hand a hedonic pricing model can be regressed.

The long-run price stretch of supply is quite high. George Fallis estimates it as 8.2 (Fallis, G. 1985), but in the small run supply tends to be very price inelastic. Supply price elasticity depends on the suppleness of substitution and supply restrictions. There is important substitutability both between land and materials, and between labor and materials. In high-value locations, multi-story real buildings are typically built to reduce the amount of expensive land used. As labor costs improved since the 1950s, new materials and capital intensive techniques have been employed to decrease the amount of relatively expensive labor used. However supply restrictions can considerably affect substitutability. In exacting the lack of supply of skilled labor, can constrain the replacement from capital to labor. Land availability can also limit substitutability if the area of awareness is delineated. Land use controls such as zoning bylaws can also decrease land substitutability.