Transcript M - Property Development

UEMC2513 Building
Economics and Finance
Introduction To Urban Land
Economics
Learning Objectives
After studying this topic you will:
• be able to explain the concept of ‘economic rent’
• Show how a demand curve of land can be determined
• Explain and illustrate how the interaction of demand
and supply will lead to an equilibrium market price or
rent
• Explain the economic rationale for intensity of site use
• Explain how the timing of redevelopment is an
economic decision
© Chia Fah Choy 2005
Land
• Undeveloped land, or ‘pure’ land, refers
solely to natural resources and space.
• Land as a whole i.e. the earth’s land
surface – can be regarded as being
fixed in supply.
• Increasing such land by reclamation
from the sea shall be view as an
additional to capital goods rather than to
land.
© Chia Fah Choy 2005
Economic rent
Price
S
N
P
D
ECONOMIC RENT
L
P1
D1
O
M
Quantity of ‘Pure’ Land
Demanded and Supplied
© Chia Fah Choy 2005
The Pricing of Land
• Price perform the vital function of rationing
scarce supply among competing uses.
• Supply of land can never be regarded as
fixed from the viewpoint of any one use.
• The productivity of land can usually be
increased in response to additional
demand by using it more intensively by the
addition of capital.
• Land as whole are entirely demanddetermined – a tax on pure land has no
disincentive effect on the supply of land
© Chia Fah Choy 2005
The Pricing of Land
• Unless all forms of land use are taxed
equally, the pattern of land use will be
distorted
• Whether such distortion is on balance good
or bad can only be decided by:
– A comparison with the inevitable distortions
produced by alternative taxes
– Its connection with spillover benefits and costs
– One’s political views
• Cost of production include normal profit –
what is necessary to keep the entrepreneur in
the current line of production
© Chia Fah Choy 2005
The Commercial Rent of
Land
• Commercial rent is simply a periodic
payment for the hire of land.
• Normally, there is competition for land
between the different potential users.
• The rent of land, therefore, is determined
in the absence of any government
interference, by the interaction of demand
and supply.
© Chia Fah Choy 2005
The Demand of Land
Assumptions:
• The land under discussion is homogenous
• Buyers are only interested in maximising
private utility or money returns
• Conditions of demand and supply do not
change
• A long-period situation prevails
• The output at which profits are maximised is
known
© Chia Fah Choy 2005
The Demand of Land
• The demand for land as a factor of production is a
derived demand
• It has to be combined with other factors, labor and
capital, to produce the goods that are wanted
• The quantity of land which a firm demands
depends upon:
– its productivity
– the price relative to other factors
– the price of the final product
© Chia Fah Choy 2005
The Demand of Land
Thee main problems have to be answered:
• How does a change in the price of land
relative to other factors affect the demand
for land?
• How will a change in the productivity of land
in a particular use affect demand?
• How will a change in the price of the
product affect the demand for land in that
use?
© Chia Fah Choy 2005
The Optimum Combination of Factors of Production
C
P
A
EP20
O
M
L
Land (units)
© Chia Fah Choy 2005
The Optimum Combination of Factors of Production
Price of
land rise
C
Q
B
A
P
More capital is now combined with
less land
Level of output has been reduced
from 20 units to 10 units
EP20
EP10
O
N
M E
L
Land (units)
© Chia Fah Choy 2005
The Optimum Combination of Factors of Production
Increase in
productivity
C
The same output can be produced
for a smaller outlay
P
A
K
EP20
R
EP’20
O
M S
L
Land (units)
© Chia Fah Choy 2005
The Optimum Combination of Factors of Production
Price of land increase
Quantity of land remained
C
Land has to be employed
extensively EP10
P
A
EP20
F
O
H
M
EP10
E
L
Land (units)
© Chia Fah Choy 2005
The Optimum Combination of Factors of Production
Increase in
demand
C
More capital and more land
would be demanded
R
P
A
EP30
EP20
O
M F
L
Land (units)
© Chia Fah Choy 2005
The Demand of Land
• A fall in the price of a factor will lead to an
extension of demand (the demand curves
slopes downwards)
• An increase in productivity or an increase in
the price of the product will lead to an
increase in demand for the factor (the
demand curve moves to the right)
© Chia Fah Choy 2005
Supply, price and the time period
Sm
P1
P2
P3
P
O
Quantity demanded and supplied (units)
© Chia Fah Choy 2005
The dominance of stock of real
property on its price
Demand for houses
(determined by
income, tastes, etc)
Existing stock
of
accommodation
Net annual
new
construction
Prices of houses determines
amount of new houses it is
profitable to construct
Determines the demand for, and
prices offered for, building sites.
Competition among developers
ensures that any supernormal
development profit tends to accrue
to sellers of building sites in the
form of higher land prices
© Chia Fah Choy 2005
Perfectly competitive factor market
RM
A
B
Economic Rent
(surplus)
C
MC
Total cost
of Capital
MRP
O
M
Unit of capital
© Chia Fah Choy 2005
Perfectly competitive factor market
RM
A
Value of Site
B
C
MC
Total cost
of Capital
MRP
O
M
Unit of capital
© Chia Fah Choy 2005
Effect of changes in the productivity
RM
A’
A
B
C
• the price bid will be for the best use of the site.
• The alternative use with greater productivity
would shown by the higher MRP’ curve
• A higher building and a higher site price will
result from a rise in the MRP of capital
• The higher the land price, the more intensive
use of the land is required. High land prices
have C’
caused high buildings
• Competition will ensures that the site is
developed upwards to the point where MR=MC
where A’BC’ is maximum
MRP’
MRP
O
M
M’
Unit of capital
© Chia Fah Choy 2005
Effect of changes in the rate of interest
• A fall in the interest would lower the cost of
each capital unit.
• The price of site will rise from AiC to Ai’C’
RM
A
i
C
C’
i’
MRP
O
M
M’
Unit of capital
© Chia Fah Choy 2005
Gross annual returns and operating
costs over time
Expected
gross
annual
return
and
operating
cost (£)
Operating Costs
Expected net
annual return for
any given year
Expected gross
annual returns
O
N
Z
Years
© Chia Fah Choy 2005
The present value of a land resource
over time
Present
value
(capitalised
future
NARs) in
existing use
P (£)
Present value of
building in its
existing use
O
Z
Years
© Chia Fah Choy 2005
The value of cleared site
PV of
current
highest
and best
use, costs
of clearing
site and of
rebuilding
PV of current
highest and
best use
Deduct
cost of
clearing
site
Cost of
rebuilding
B
A
O
R
Value of
cleared site
-
Years
© Chia Fah Choy 2005
The timing of Redevelopment
PV of
existing
use +
value of
cleared
site
Value of
cleared site
Secures
land and
building in
existing use
O
-
Retains
land and
building in
existing use
R
T
Z
Years
PV of
existing use
Redevelopment
© Chia Fah Choy 2005
Factors influencing Land Value
•
•
•
•
•
•
•
Supply and demand
The permitted use
Location
Physical characteristics
Availability of public services
Form of title
General nature of the surrounding
© Chia Fah Choy 2005
Site Characteristics
•
•
•
•
•
•
•
•
•
•
Soil conditions
Groundwater
Contours
Contamination
Obstructions
Services
Access
Aspect
Site boundaries
Area of site
© Chia Fah Choy 2005
Labor Land
0
1
2
3
4
5
6
7
8
9
10
100
100
100
100
100
100
100
100
100
100
100
Total
Labor
0.0
10.0
14.1
17.3
20.0
23.4
24.5
26.5
28.2
30.0
31.6
Marginal
Product of
Labor
10.0
4.1
3.2
2.7
3.4
1.1
2.0
1.7
1.8
1.6
Land
200
200
200
200
200
200
200
200
200
200
200
Total Marginal
Product Product
0.0
14.1
20.0
24.5
28.2
31.6
34.6
37.4
40.0
42.4
44.7
14.1
5.9
4.5
3.7
3.4
3.0
2.8
2.6
2.4
2.3
© Chia Fah Choy 2005
45
40
35
30
Output
25
20
15
10
5
0
0
1
2
3
4
5
6
7
8
9
10
Labor
Y = (L, 100)
Y = (L, 200)
Poly. (Y = (L, 200))
Poly. (Y = (L, 100))
© Chia Fah Choy 2005