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Summary Economics, Real Estate and the Supply of land (course: Real Estate and Land Supply)
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Summary of chapters 1-6, 8-11 and 14-16. All the graphs of the chapters are included and explained.
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Summary of all graphs Real Estate & Land Supply
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Chapter 1: Introduction: The market for land and propertyThe supply of land
Two important factors for the supply of land for a particular use at some location is:
Contiguity (being in direct contact). The spatial relationship of sites, their size and their
configuration if they are put together may not merely be important but crucial.
Ownership of land: who owns it, how is it owned, attitudes towards the land owned.
The demand for land
David Ricardo (Ricardian approach) sorted out the main themes of the rent theory. According to him
land is the primary determinant of land rent and land values. The owner of land merely uses the land
or allows it to be used to yield the highest income (David Ricardo). Ricardo’s analysis is based on twin
assumptions:
(1) All of the (fixed) supply of land was used for agriculture (single use), land in any urban use
could be ignored. (2) There is only one agricultural product: corn.
Johann Von Thunen (Von Thunen approach) tried to explain differences between the rents and values
of different pieces of land. He found that:
Rents and land values were highest close to any major town which was a market for produce
and declined rapidly with distance from the market.
Agriculture close to the major town was different to that found further away where the cost
of transport of the product were higher.
There were kind of concentric zones. The demand for sites further from the city was lower
and the rent were lower. It is the demand for land that determines the rent. Landowners have
no role other than trying to obtain the highest possible rent.
Alsonso and Wingo among others build further on the Von Thunen approach.
The central business district replaces the urban area as the destination to travel
The concern is with the daily movement of people to their workplace in the city centre
This explained the decline in land values with distance from the city as well as the patterns of location
of different social groups (Muth and Evans).
Both Von Thunen and Ricardo acknowledge that the demand for land determines the rent to be charged.
The supply of land is unimportant. This is realistic in the case of agricultural land. The problem is that
it continued to be made when the analysis was extended to urban areas. This is less realistic. There
have been contributions that the owner of a piece of land does have a choice. These contributions
together define a topic which may be called a theory of the supply of land. There is a further factor
which increases the necessity for a proper understanding of the land market and that is the need to
understand economic effects of the system of land use planning which is in operation.
,Chapter 2: land values, rents and demands: fixing a hole
Introduction
The basic theory of rents implies that land value and rents are determined by demand.
Ricardian rent theory
Assumptions:
1. The supply of land is fixed (line SS’)
2. The land has a single use: to grow corn.
3. (Rent did not enter into the cost of production in the corn market.)
Reason: No alternative use Opportunity cost = 0
OS hectares will be supplied whatever the rent offered or paid (above
zero). The demand for land is derived from the demand for corn (or
another single product) and is represented by the downward sloping
demand curve DD’.
Conclusions:
1. The rent of land is high because the price of corn is high and not vice versa: since the demand for land is
derived from the demand for corn.
2. Taxes will not affect the rent, or the quantity of land supplied. The rent is fixed no matter what price paid
for it and the rent paid will be OR, as determined by the demand for land.
Neoclassical rent theory
The analysis with one land use and a fixed supply of land was set aside. Land has alternative uses.
Therefore, land has an opportunity cost – the rent that could be obtained in the most profitable
alternative use. It followed that the rent of land did enter into the cost of production.
Assumptions:
1. The supply of land is fixed.
2. The land has two uses: to grow potatoes (PP’) and to grow
corn (CC’)
3. (Rent did enter into the cost of production.)
Reason: Land has alternative uses.
The smaller the amount of land used for growing corn, the
smaller the amount of corn for sale and the higher its price. At
the intersection the rent is the same, the competition between
the two landowners ensures so.
Only at that rent will the total quantity of land demanded for the two uses equal the supply. OX is the supply of
land for potatoes and XS is used for growing corn.
Conclusion:
The price of corn has risen because the rent of land has risen. An
increase in rent of land can increase the price of a good
PP1 shows the growing demand for potatoes
This means a reduction in the land available for corn from SX to SX1.
There is an increase in the rent paid for the land from OR to OR1:
less land for corn, the higher the price.
Thus: the price of corn has risen because the rent of land has risen.
On the basis of the above, the Ricardian analysis can be incorrect:
The rent of land for a particular use is not solely determined by the demand for the product.
If land has alternative uses and can be shifted from one use to another it is incorrect.
Land taxes can affect the use of land. It could result in a shift in the use of land from the
higher to the lower taxed use with the tax being passed on in the form of a higher price for
the product of the land taxed at the higher rate.
, Planning controls and rent theory
The system of planning control in Britain caused a situation in which the Ricardian rent theory is
more applicable and relevant than neoclassical rent theory. These planning control ensure the
separation of the markets for different uses. Each piece of land can be regarded as having a single
use, the use allowed by the planning system. In these circumstances, the Ricardian theory is more
relevant.
OS is the supply of land of which OX is solely used for housing and XS for
agriculture.
The demand for housing is HH’ and for agriculture A’.
Rh is the rent for land for housing
Ra is the rent for land for agriculture
Therefore, when the supply of land for each use is fixed within the planning
system, the price of land is determined by demand.
The argument that the supply of land, if it can be changed does affect the price of land can be easily
demonstrated.
The demand for housing is HH’
The supply of land for housing shifts from X to X1: this causes a lower rent.
This price has been reached by increasing the supply, given the demand curve.
This figure thus should make clear that price is determined by both demand
and supply.
Hierarchical planning systems
There remains one situation where both the Ricardian and the neoclassical models may be relevant:
in the case of hierarchical planning systems. For example, it is easier to obtain planning permission
for the redevelopment of industrial land for housing, but almost impossible to reverse the process.
Assumptions
1. DD’ is the demand for industry, IO is the supply of land for industry. OP1 is
the price for land for industry.
2. HH’ is the demand for housing, IS is available. SPh is the price.
3. The demand for housing increases: HH1’.
The price of housing land will increase relative to the price of industrial land. It
now becomes profitable to develop industrial land for residential use. Some
land will be lost to industry and the price of land for housing will tend to fall
and the price of industrial land will tend to rise. The new equilibrium is E.
So, the situation started with being best represented by the Ricardian model and will change to one which is best
represented by the neoclassical model.
Urban rent theory
Horizontal axis: distance to the city centre. Vertical axis: rent
The rent of land at the city centre is OC. The rent outside the city is OA.
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