Full summary of the book Urban Land Economics by Jack Harvey & Ernie Jowsey. Written when following the course Real Estate Principles at University of Groningen. The summary covers all aspects and chapters of the book and includes pictures and explanation of the figures.
Chapter 21: Economic Theory and Public Finance ......................................................................................... 58
Chapter 20: The Impact of Government Macro Policy on Land and Property Resources ................................ 61
Chapter 23: UK Property and the EU ............................................................................................................. 62
Chapter 12: The economics of planning controls........................................................................................... 63
Chapter 17: The quality of the urban environment: problems of urban areas ............................................... 69
Chapter 22: The Incidence of land taxation on land resources ...................................................................... 72
Summary Urban Land Economics - Real Estate Principles – University of Groningen – Written by 1
Anneke van Driel
,Chapter 2: Characteristics of the Real Property Market
2.1 Is there a real property market?
Exchange economies: people specialize in production in order to increase total output. Both factors of
production and final products are exchanged. Both buyers and sellers benefit from them. Exchanges
take place on the basis of prices determined in the market by the interaction of demand and supply.
A market: any arrangement by which buyers and sellers are brought together to fix a price in which
goods can be exchanged.
The real property market: The arrangement by which buyers and sellers of virgin land, agricultural
estates, industrial buildings, offices, shops and houses are brought together to determine a price a t
which the particular property can be exchanged.
Real Property Rights / interests: The real property market deals in the rights (in written statements)
relating to real property rather than in the land and building themselves, since these are not moveable.
The separation of real property rights is more usual than with personal property. The largest
collection of rights which a person can hold in real property is ‘fee simple absolute’: the unencumbered
freehold. But all the rights inherent in this ownership can be separated and transferred individually to
other people. In any different land resource different people may have different rights (freehold
ground rent, head-lease, sub-lease, mortgage, rent charge, etc). The exact rights transferred can be
finely adjusted according to the individual preferences of the seller or buyer, by e.g. a restrictive
covenant. This is achieved automatically through the free-market mechanism and is reflected in prices.
- A lease may be granted to a person to erect a building on a plot of land and enjoy the rights to this
building and land for a certain period on payment of a specified yearly sum to the lessor. Provided
the terms of the ease are fulfilled, the lessor’s rights are for this period now restricted to the
receipt of a freehold ground rent. The freehold has thus been divided into two interests: the
leasehold and the freehold ground rent.
4 important aspects of real property rights need emphasis:
1. The fee simple absolute owner can possess, use, abuse and destroy his real property. He can sell
rights to restrict their future use or bequeath them to distant heirs. Also, the rights are limited:
property can only be used subject to other property rights (ancient lights, drains or pipe water)
and he is subject to the legal restraints imposed by planning Acts, building regulations and similar
legislation.
2. The concept of rights is essentially a legal one: it presupposes that there is a sovereign power which
will, if necessary, protect the rights vested in the owner. So, a right is merely exclusive, not absolute
or unlimited.
3. Some rights are not transferable to another property. E.g. persons with low income should enjoy
some form of housing subsidy. This right has not been attached, as intended, to the persons, but
to the occupation of a particular property, such as a rent-controlled flat. People occupying such
accommodation are restricted in their mobility as compared with owner-occupiers.
4. Real property is durable, so rights existing in real property have a long time-scale. Real property
rights like stocks and shared are therefore demanded as investment assets, so the market can now
be regarded as a part of the wider investment asset market.
2.2 The efficiency of the real property market
The efficiency of a market depends on both technical and economic characteristics.
Technical characteristics: Physical conditions ensure that price differences for the same commodity
within the market are eliminated easily and quickly. Buyers and sellers must have up-to-date
knowledge of price differences and base their actions solely on price. Dealing costs should be small
relative to the value of the transaction. But, knowledge tends to be obtained infrequently and is limited
geographically. Individual property’s have their own characteristics. Their great heterogeneity means
Summary Urban Land Economics - Real Estate Principles – University of Groningen – Written by 2
Anneke van Driel
,that a professional valuer cannot fully assess their respective merits, so valuation is subjective. The
role of valuers and agents are of great importance for the smooth working of the market.
The real property market is an omnibus term covering a number of separate markets. Some markets
are quite distinct, others are closely related and overlapping (e.g. houses and shops can be sold for
both occupation and investment). Some, where institutional investment demand dominated, are
national in coverage (e.g. offices and prime shop property). Others, where demand is local, tend to be
divided geographically (such as owner-occupied houses and seaside hotels). Within these markets,
differences in rent persists, changes in demand not being fully effective until leases has expired. All
markets and sub-markets have in common that the commodity traded in is is real property rights, even
though such rights can take a variety of forms.
Economic characteristics: Generally speaking there is freedom of entry into the real property markets,
resulting in many buyers and many sellers. But certain conditions allow an owner to gain some
monopolistic control:
- The geographical divisions of the market lead to imperfect competition between local markets;
- The imperfection of the capital market may prevent some would-be buyers from borrowing the
large sums required for certain purchases, such as multi-storey office blocks;
- The spatial fixity of real property puts certain site-owners in a strong position relative to buyers. If
a developer has purchased every freehold interest expect one for a given project, the owner of the
outstanding site can exploit his monopoly power by demanding a price far in excess of that paid
for the other sites.
Conclusion
- Prices are the signals which indicate changes in the conditions of demand and supply. Demand and
supply adjust to these signals.
- Where markets are detective/imperfect, price signals work at less than full efficiency and
adjustment in supply and demand are slow. High transaction costs (for obtaining knowledge or for
legal procedures) restrict the extent to which a small price change can motivate adjustments to
supply and demand. Also, limitation of the markets localizes demand and supply, making it easier
for imperfect competition to exist.
- The market might be improved by making knowledge better or more readily available by
institutions or government action. There should be professional associations which prescribe
standards of competence in valuers; universities and professional bodies which develop improved
methods of valuation; estate agents who record property details in data banks; newspapers and
journals which advertise current rent prices; prices paid in real property transaction should be
made public. Another improvement includes reducing the legal costs of transfer, this can help the
market to respond to small changes in price.
Summary
Markets are any arrangement by which buyers and sellers are brought together to fix a price at which
goods can be exchanged. Real property involves land, agricultural estates, industrial buildings, offices,
shops, and houses which can be exchanged in formal and informal markets. There are many sub-
markets and the ‘real property market’ is an abstract aggregate of these. The real property market
deals in ‘property rights’ or clearly defined legal interests. These rights can be separated, for example
into the leashold and freehold ground rent. If rights are clearly defined and the costs of negotiating
and enforcing contracts are small relative to the overall transaction, the market, based on prices works
efficiently. The efficiency of the real property market is reduced by:
- Imperfect knowledge, which creates a role for specialists such as valuers;
- Imperfect competition (monopoly interests)
- Relatively high costs of dealing.
Nevertheless, prices of real property do respond – given sufficient time- to changes in market
conditions of supply and demand.
Summary Urban Land Economics - Real Estate Principles – University of Groningen – Written by 3
Anneke van Driel
, Chapter 3: Functions of the Real Property Market
3.1 Dealings in real property interests
Classification of interests
Freeholds: involve the holder in the full financial risks of ownership, and if rents rice through
inflation, a freehold interest provides a hedge against inflation.
Leaseholds: Occur where a freeholder grants a lease for a number of years, during which time he
parts with some of his equity interest in exchange for a premium and/or for a regular
fixed money income. Thus, leaseholds are equivalent to fixed money interest-bearing
bonds, though they assume a greater equity interest as the lease nears its reversion
date.
Freehold Gr- Paid on long leases of undeveloped land. Certainty of payment means that FGRs
ound rents similar to an investment in gilt-edged securities.
Mortgages Long-term money loans against the security of property. Interest and capital
repayment in money terms are fairly certain, so mortgages can be regarded as almost
equivalent to debentures and medium-term government bonds.
Who deals in property interests?
Occupiers: demand property either for use. Can be found in private and public sectors.
o As a consumer good (house, garage). Wanted for the satisfaction it yields directly.
Demand varies with tastes, income, etc.
o As a producer good (shop, farm, office, factory). Demand is derived from the
contribution it makes to the production, and thus depends upon its marginal revenue
productivity.
Investors: regard property primary as a store of wealth. An alternative to other types of
investment asset. But investment demand cant be completely separated from
occupation demand. Investment in real property is possible because some occupiers
prefer to rent rather than to buy their premises. Also, the amount of rent paid will
affect the capital value of the interest.
3.2 Functions of the real property market
The market indicates: the price of a good reflects current conditions of demand and supply, it indicates.
It also motivates: because buyers and sellers respond to the price signals. The price system functions
through the market. The functions of the real property market are the following:
1. To allocate existing real property resources and interests
2. To indicate changes in demand for land resources and interests
3. To induce supply to adjust to changes in demand
4. To indicate changes in the conditions upon which land resources can be supplied
5. To induce demand to respond to changes in the conditions of supply;
6. To ‘reward’ the owners of land resources.
1. To allocate existing real property resources and interests:
Land resources are scare (not unlimited in supply), they have to be allocated between the various uses
and people wanting them. This is achieved by arriving at the equilibrium market price: the price which
equates the recourses/interests being offers for sale with what people wish to buy.
Summary Urban Land Economics - Real Estate Principles – University of Groningen – Written by 4
Anneke van Driel
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