1 Real Estate Economics MBC Dec11

PHILIPPINE ASSOCIATION OF
REAL ESTATE BOARDS, INC (PAREB)
Gensan-Sarangani REB
REAL ESTATE ECONOMICS

by Maya Bandolon-Cartojano, REC, REA, REB
TOPIC COVERAGE - 4hrs

A. Basic economic concepts
B. Real Estate economics
1. Market characteristics
2. Demand
3. Supply
C. Real Estate Broker's Role
D. Forecast Variables
1. Residential housing construction
2. Macroeconomic trends
a. Inflation Rate Movements
b. Interest Rate movements
c. Foreign exchange rate movements

2
3. Government Macroeconomic
Policies (fiscal policy, monetary
policy, physical policy - housing & u
development programs, energy &
environment programs
E. Factors affecting real estate
value
F Philippine Real Rstate Economic
Trends
G. Current events
Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015
BASIC ECONOMICS
What is economics?
The study of human interaction
The study of scarcity
The study of resource allocation
The study of production and consumption
BASIC ECONOMICS
Needs things that are necessary
for survival
CLOTHES
FOOD
HOUSING
4
Real Estate Economics by MayaCartojano 5 April 2015

REC, REA, REB
BASIC ECONOMICS
Wants things not necessary for
survival but that add comfort
and pleasure to our lives

REC, REA, REB
BASIC ECONOMICS
RESOURCES
Personal resources time, money, skills we use to satisfy
our wants
Economic resources the means through which goods
and services are produced
Natural resources raw materials supplied by nature
Human resources (also called labor) - people who work
to produce goods and services.
Capital resources (or capital) the tools, equipment, and
buildings that are used to produce goods and services
6

REC, REA, REB
The basic economic problem

is
SCARCITY
because we have limited
resources but unlimited wants.
7

REC, REA, REB
BASIC ECONOMICS
You have to make a choice. You have P200 and have
been invited to a movie with a friend but you also want
to buy a new book of your favorite author. You are also
trying to save for Palawan trip during Christmas break.
What do you do?
Opportunity Cost:
The next best alternative what a person gives up to
get something.
8

REC, REA, REB
TWO CATEGORIES OF
ECONOMICS
Macroeconomics: study of the
national economy and its segments
including national income, output,
employment, and growth.
Microeconomics: study of individual
firms and households.

REC, REA, REB
WHAT IS REAL ESTATE

ECONOMICS?
A study of people & how their actions affect property values.
Study that uses economic principles

Micro and macro analysis
Analyzes trends
Considers supply and demand
Links general economic theory and real estate
practice
General Economics
Principles
and Theory
10
Real Estate
Economics
Real Estate
Principles
and Practice

REC, REA, REB
STAIRWAY OF REAL ESTATE

ECONOMICS
Final Real Estate Decision
Investment Analysis
Taxes, Land Usage, and Environmental Controls
Real Estate Market Analysis
Regional and Community Analysis
Real Estate and the National Economy
Governments Role in the Economy
Basic Economic Principles
11

REC, REA, REB
Residential Real
Estate Markets

Real estate economic characteristics
1.
2.
3.
4.
Fixed supply in short run

Immobile-Local market is
key
Long economic life
Lack of standardization
Key Concept:
Short term movements in prices and rents
caused by changes in demand, not in supply.
13

REC, REA, REB

What is a market?
A place where buyers and sellers meet to
exchange items of value.
Competition varies directly with:
14
Number of buyers
Number of sellers
Homogeneity of units available
Knowledge by all parties vs. advantage over the
other party to distort price or market activity
REC, REA, REB

Characteristics of the Real Estate
Market
15
Buyers & sellers are not numerous

Local nature of the market
Number of buyers/sellers for a particular
class of property is usually limited
Number of buyers/sellers is small in
comparison to other commodities
REC, REA, REB

Characteristics of the
Real Estate Market
Real estate is heterogeneous, bulky,

expensive
Each property has a different location
that is permanently fixed
16
Combined land, capital & financing is unique
Soil, topography, climate unique

REC, REA, REB

Market
Buyer/Seller knowledge is frequently
poor due to
17
Infrequency of entry into the market

Limited number of comparable bids and offers
Complexity of legal requirements needed to
transfer ownership
REC, REA, REB

Market
18
Willingness of buyers/sellers impaired due to

Limited supply of real estate
Limited number of buyers and sellers
Limited financing options for particular
properties
Differences in compulsion to buy by
individuals
REC, REA, REB

Market
Supply of land is fixed
Land is fixed = fixed supply
Housing units (density) may be increased
Construction time
Average of 2 years to increase/build
units
Short run: supply limited
Long run: supply may be increased
19

REC, REA, REB
Rents and Prices:

Real Estate Demand Curve
Price
or Rent
As Price Decreases,
Quantity Demanded
Increases
& vice versa
P5
M
P4
M
P3
M
P2
M 0
P1M
20
500 1000
2500
1500
2000
Quantity
or Space

REC, REA, REB
Real Estate Demand

Increase in Demand caused by
21
Population
Income
Cost
Government action

REC, REA, REB
FORECAST VARIABLES
RESIDENTIAL HOUSING
DEMAND VARIABLES
1.
Population
Numbers, Owner Occupied, Demography,
Renters
2. Income
Economic base trends and employment,
Disposable income trends, Discretionary
income for speculation and investment
3. Costs
Cost of household operation, costs of transport
22

REC, REA, REB
FORECAST VARIABLES
RESIDENTIAL HOUSING
DEMAND VARIABLES
4. Credit
Interest rates, Loan-to-value ratios, Payback
periods. Borrower qualifications
5. Other Factors: Tastes and Customs
Single family vs. condominiums, Rent vs. buying
23

REC, REA, REB
Real Estate Supply

Land is fixed
Number of housing units on
land is not fixed.

Increasing supply takes a long
time.
24

REC, REA, REB
Short Run & Long Run Supply Curves

Price
or Rent
Short Run
Supply Curve
P5
M
Long Run Supply Curve
P4
M
P3
M
P2
M 0
P1M
25
500 1000
2500
1500
2000
Quantity
or Space
Long Run Supply Curve is more Elastic

REC, REA, REB
Real Estate Supply
Increase in supply is caused by:
Construction
Conversion
Demolition
Destruction
26

REC, REA, REB
Forecast Variables Residential

Housing
SUPPLY VARIABLES
1. Rate of New Construction
Construction Cost
Land Availability
Credit for Construction
Demand for Housing

2. Rate of Conversions
Interest rates
Economic base trends
Environmental Constraints
3. Rate of Demolitions
Number of
existing housing
units
4. Rate of
Destructions
Manmade
Natural
Coastal controls, Building

moratoriums sewer and
water
Planning controls
27
Zoning, Building
codes
Real Estate
Economics by MayaCartojano
REC, REA, REB
5 April 2015
Assuming a decrease in demand,

supply will change:
As demand falls, vacancies increase
Increased vacancies lead to fall in
rents/prices
Long term effects of rent/price decrease:
28
More space available at lower cost

Out-of-pocket costs for least desirable
property
Costs exceed income generated
Abandonment or demolition
REC, REA, REB
Real Estate Supply is Fixed in the ShortRun

Price
Supply
P5
M
P4
M
Demand
P3
M
P2
0 500 1000
M
2500
29P1M
Rents and
Prices change
with shift in
Demand
1500
2000
Quantity

REC, REA, REB
Compare Price/Rents when Demand changes with

Fixed Supply
Supply
Fixed
Supply
Price
Price
Equilibrium
Deman
d
Lower
Deman
d
Demand
Quantity
Short term price changes caused by demand
Quantity
Decrease in Demand equals Decrease in Price
Fixed
Supply
Price
New
Higher
Demand
Old
Quantity
30
Increase in Demand equals

Increase in Price/Rent
Demand

REC, REA, REB
Supply * Demand
Old
New
Supply Supply
Old
Supply
New
Supply
Old
Price
Price
New
Price
Same
Demand
Quantity
Increase in Supply when Demand remains same

will lower Price or Rent Over Building
31

REC, REA, REB
If there is an increase in demand

Increased demand reduces vacancies
Reduction in vacancies increases rents and
prices bid for short-term fixed supply
Those who cannot afford higher rents/prices:
32
Share space with others

Move to less expensive property
Increase density and intensity of use

REC, REA, REB
Inevitable Real Estate Cycles
Characteristics of Real Estate that leads to cycles:

Large economic and physical size
Need for debt
Government regulation
Typical Real Estate Cycle

Construction
begins and
accelerates as you
move up the curve
while vacancy
continues to
decline
Vacancy
increases yet
construction
continues unable
to stop
Vacancy declining and

no construction
33
Vacancy increases at a decreasing

rate, some construction

REC, REA, REB
If there is a decrease in demand

Increased vacancies
Decline in rents and
prices
Lower rents/prices
leads to:
34
Moving up to higher
price area
Reduced density
REC, REA, REB
Assuming an increase in demand,

supply will eventually change:
Profit motive: Demand pushes rents & prices
up
Construction increases (if no growth limits)
Supply overtakes increased demand,
vacancies increase
Vacancies lead to falling rents and prices
Lower rents/prices:
35
Difference between building costs/rents/sales

narrows
No longer profitable to build
REC, REA, REB
Rent controls
Rents are high because demand exceeds

supply
To rebalance the market:
Demand must decrease

Supply must increase
Rent controls tend to:
Increase demand by keeping rents low

Decrease supply by maintaining low rents
Low returns for investors reduces construction
Usually politically motivated
36

REC, REA, REB
Real Estate Market

Imperfect market compels buyers and
sellers to use a real estate professional

Professional has higher knowledge of
legal and technical aspects
37

REC, REA, REB
Real Estate Brokers Role

Client/customer rely upon brokers expertise
Be a knowledgeable, ethical broker help
overcome market imperfections:
38
Updated on increase/decrease in demand & supply

Updated on market trends and transaction details
Awareness of rents/prices
Advice on available types of profitable
investments
Lead principals through legal complexities
Give financing sources and alternatives
REC, REA, REB
Real Estate Sub Markets

Occupancy The desire to receive direct
services from the property
Investment The desire to receive services in
the form of a profit
39
May be non-monetary rewards

Prestige/pride of ownership

REC, REA, REB
Supply and Demand

The Real Estate Asset Market (Property Market)
Supply
Investors
Wanting to Sell
Market
DEVELOPERS
40
Demand:
Investors
Wanting to Buy
BUYERS

REC, REA, REB
Supply and Demand

The Space Market
Supply
Property Owners
(Landlords)
LESSORS
41
Market
Demand:
Property Users
(Tenants)
LEASEES

REC, REA, REB
Residential
Own
Rent
Commercial
Own
Rent
Office
Own
Rent
Industrial
Own
Rent
Residential
Own
Rent
Commercial
Own
Rent
Office
Own
Rent
Industrial
Own
Rent
Investment
1-4 Family
Multi-Family
Real Estate
Market
1-4 Family
Multi-Family
Occupancy
42

REC, REA, REB
43

REC, REA, REB
MACROECONOMIC TRENDS
AFFECTING REAL ESTATE VALUE
REAL ESTATE SUPPLY FACTORS
o Housing Supply
o New Construction Activity
o The Supply of Vacant Land
REAL ESTATE DEMAND FACTOR
o Population
o Purchasing Power
44

REC, REA, REB
MACROECONOMIC TRENDS
AFFECTING REAL ESTATE VALUE
NATIONAL GOVERNMENT ACTIVITY
o Housing and Urban Development Programs
o Energy and the Environment
o Government Banking and Monetary Policies
o Fiscal Policies
o Physical Policies
45

REC, REA, REB
FACTORS AFFECTING
REAL ESTATE VALUE
PHYSICAL FORCES
o Natural Resources
o Developed Resources
SOCIAL FORCES
o Family size and age-group distribution
o Neighborhood stability and attitudes about property
o Population growth, decline, or shifts at the community,
regional and national levels
o Life-styles and living standards, often combined with
other forces
o Attitudes about law enforcement, the role of government
and individual responsibility
o Attitudes about development, growth and ecology
o Attitudes toward public education
46

REC, REA, REB
FACTORS AFFECTING
REAL ESTATE VALUE
POLITICAL FORCES
o Zoning and land-use regulations
o Building and safety regulations
o Environmental protection laws
o Police, fire and health protection services
o Crime preventions, education and recreation services
o Public works; power, water, transportation, sewers and
flood control
o Fiscal policy and taxation
o Monetary policy and controlso Governmentsponsored urban redevelopment and housing finance
programs
o Regulation of industry and business
47

REC, REA, REB
CONCERNS FOR BOTH

SUPPLY AND DEMAND
IMPACT OF ENERGY SHORTAGES
IMPACT OF INFLATION
1. Actions of BSP Reserve
1. Transportation: Number of
2. Speculators seeking gains
highways and cost of travel
3. Rates of returns
2. Utility rates
4. Fiscal policy of
3. Size of homes
government
5. Property and income taxes
48

REC, REA, REB
Macroeconomic Policies
Fiscal Policy
Physical Policy
Related to budget,
government
expenditure, taxation
Related to overcoming
specific problems of the
economy
Monetary Policy
Related to money
supply, exchange rate
control and bank rate
control
Fiscal Policy
Use of Government Expenditure, and taxation to manage the economy.
Purpose of Fiscal Policy

Stabilise economic growth, avoiding the boom and
economic
BIR: bust
Income
Taxes cycle
Tariffs -Import Taxes

& Duties
DBM: Budget Management
Fiscal Spending
Variables affected by Fiscal Policy in the economy Governement Loans
& Payments
Aggregate demand and the level of economic activity

The pattern of resource allocation
The distribution of income.
50
Real Estate Economics by MayaCartojano

REC, REA, REB
Physical Policy
Meant to affect only strategic points of the economy
Purpose of Physical Policy

Overcome specific problems such as pricing of particular commodity,
shortages or surpluses developing in the economy etc.
Price Quotas
Price Ceilings/ Floor
Labor Laws/Rates
Variables affected by Physical Policy in the economy Subsidies
Product Bans
Price and distribution of specific commodity

Investment and production
Foreign Trade
51
Fuel Prices
Inflation Rates
Interest Rates

REC, REA, REB
Monetary Policy
Regulation of supply of Money and Cost and Availability of Credit in the
economy
Purpose of Monetary Policy
Maintain price stability, ensure adequate flow of credit to the
productive sectors of the economy and overall economic growth
Variables affected by Monetary Policy in the economy

Interest Rates
Liquidity
Credit Availability
Exchange Rates
52
Interest Rates
Savings
Real Estate Economics by MayaCartojano

REC, REA, REB
Available Credit
Market Activity
5 April 2015
Monetary Policy Influence

Policy Variables
- Money supply
- Liquidity conditions
Target Variables
-Inflation
- Inflation
-Interest rate
-Real GDP
-Employment
Policy Instruments
Discount Rates (loan fr BSP)
- Interest Rates (loan to clients)
-Consumption
-Savings
-Investment
- Reserve Requirements
53

REC, REA, REB

INTEREST RATES
- Availability of credit influences RE
Development and RE Market
Available Credit/Loans
More active market
More RE Buying
More RE Development
54
Interest Rates
Savings
MONETARY POLICIES
Interest Rates
Savings
Lending
Public Spending
Business Investments
RE Buying
55
Real Estate Economics by MayaCartojano5 REC,

April REA,
2015REB
Compare Current Market

Indicators
56
Number of deeds recorded

Number of loans: conventional, DVA, FHA
Foreclosure rates
Trends in rents and resale prices
Building permits/subdivision activity
Construction costs
Vacancies (utility company; change of address)
New home inventory
Classified section activity
MLS, including price changes
Local population trends
Government housing support programs
REC, REA, REB
Interest Rates Movement

Boost Economy after
2001 Slowdown /
dotcom bubble
Stable IR from
2004 to 2006
57
Rise in IR to control liquidity,

due to Heavy Capital Inflow &
to curb RE Appreciation
IR hikes to
curb inflation
IR Cuts to boost
Economy
Inflation Movement
IR hikes proved to
Be effective
To curb Inflation
Uncontrolled Inflation despite

Further IR hikes
Inflation Down on account

of global credit crunch
http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
58
Interest Rates Movement

Market Driven
Controlled
Banks to make available more

funds
& More Efficiency
59

REC, REA, REB
Exchange Rate Movement
60
Sterilization to
Control peso
Appreciation

REC, REA, REB
ADVANTAGES OF
REAL ESTATE INVESTMENT
CASH FLOW
= PASSIVE INCOME
61

REC, REA, REB
ADVANTAGES OF
MORE INCOME
RENTAL YIELD is more
than
BANK SAVINGS RATE
62

REC, REA, REB
ADVANTAGES OF
LEVERAGE
(CAN BE USED AS
COLLATERAL)
BANK
63

REC, REA, REB
ADVANTAGES OF
INFLATION
64
HEDGE AGAINST
INFLATION

REC, REA, REB
ADVANTAGES OF
INFLATION VS.
CAPITAL GAIN RATE
65

REC, REA, REB
ADVANTAGES OF
FLEXIBILITY /
EXPANDABILITY
66

REC, REA, REB
ADVANTAGES OF
TAX
67
DEPRECIATION
(HEDGE VS TAX)

REC, REA, REB
ADVANTAGES OF
POWER OF
AMORTIZATION
5 April 2015
Real Estate Economics by

MayaCartojano REC, REA, REB
68
ADVANTAGES OF

PREDICTABILITY/
CONSERVATIVE
69

REC, REA, REB
ADVANTAGES OF
LIFETIME
INVESTMENT
LEGACY
RETIREMENT
MID-LIFE STATUS
YOUNG FAMILY
NEW COUPLE
SINGLE STATUS
5 April 2015
Different Lifestyles, Life

Cycles, Personal Goals,
Levels of Wealth70
Real Estate Economics by
MayaCartojano REC, REA, REB
Gross Rental Yields - Philippines Compared

to Continent
10.99%
71

REC, REA, REB
House Price Changes, 5 Yrs (%) - Philippines

Compared to Continent
72

REC, REA, REB

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What are the different types of resources discussed?

PHILIPPINE ASSOCIATION OF

REAL ESTATE BOARDS, INC (PAREB)

REAL ESTATE ECONOMICS

TOPIC COVERAGE - 4hrs

a. Inflation Rate Movements

b. Interest Rate movements

c. Foreign exchange rate movements

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

The basic economic problem

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

WHAT IS REAL ESTATE

Study that uses economic principles

Real Estate Economics by MayaCartojano 5 April 2015

STAIRWAY OF REAL ESTATE

Real Estate Economics by MayaCartojano 5 April 2015

REAL ESTATE ECONOMICS

Fixed supply in short run

Real Estate Economics by MayaCartojano 5 April 2015

REAL ESTATE ECONOMICS

REAL ESTATE ECONOMICS

Buyers & sellers are not numerous

REAL ESTATE ECONOMICS

Real estate is heterogeneous, bulky,

Combined land, capital & financing is unique

Soil, topography, climate unique

REAL ESTATE ECONOMICS

Infrequency of entry into the market

REAL ESTATE ECONOMICS

Willingness of buyers/sellers impaired due to

REAL ESTATE ECONOMICS

Real Estate Economics by MayaCartojano 5 April 2015

Rents and Prices:

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Demand

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Economics by MayaCartojano 5 April 2015

Real Estate Supply

land is not fixed.

Real Estate Economics by MayaCartojano 5 April 2015

Short Run & Long Run Supply Curves

Long Run Supply Curve

Long Run Supply Curve is more Elastic

Real Estate Supply

Increase in supply is caused by:

Real Estate Economics by MayaCartojano 5 April 2015

Forecast Variables Residential

1. Rate of New Construction