Real Estate Economics

Ernie Jowsey
Principal Lecturer in Applied Economics, Built Environment,
Sheffield Hallam University, UK

B 375666

macmillan

Contents

List of Boxes, Figures and Tables

Preface

xiii
xviii

Acknowledgements

xix

Part I The Economic Framework

1 The Scope of Economics

Why we need to study real estate economics

The economic problem: limited resources but unlimited wants
The market economy
The command economy
The mixed economy
Positive and normative economics
Microeconomics and macroeconomics
Sustainable development
The limitations of economics
Summary

3
5
9
11
11
12
16
17
18
19

Economic Efficiency
Welfare and economic efficiency
Conditions necessary for Pareto optimality
Achieving the conditions of economic efficiency
Conditions necessary for economic efficiency
through the price system
Weaknesses of the price system
The allocation of real estate resources
Summary

20
20
21
26

Part II

29
32
34
34

Land and Property in the Economy

3 Real Estate Markets

Why'real estate'?
Real property rights
The real property market

39
39
40
42

Viii

CONTENTS

Are real estate markets efficient?

Dealings in real property interests
Functions of the real property market
Summary

45
50
51
56

Land and Property Price Determination

Land as a whole
The commercial rent of land
The equilibrium market price or rent
.
Non-homogeneous land and economic rent
The pricing of land resources
The dominance of stocks over flows
The price of land and property
Building costs and property prices
Tax implications of economic rent
Summary

58
58
60
63
63
64
65
69
70
71
73

Residential Property Markets

The provision of housing through the market economy
Housing policy
UK government intervention in the housing market
Household tenure in the UK
The credit crunch and UK residential property
Future provision of housing
Overview of residential property markets
Summary

6 The Cyclical Nature of Real Estate Markets

Business cycles and property cycles
The UK real estate market 1945-79
The UK real estate market 1980-9
The UK real estate collapse 1989-91
The UK real estate market 1991-9
The market boom, 2000-7
The credit crunch recession, 2007-10
Summary
Part III

75
75
80
82
90
104
106
111
111
113
113
116
119
122
124
130
132
137

Property Development

7 The Development Process

The nature of development
Functions of the developer
The rationale for development
Choosing between development projects
Allowing for risk and uncertainty

141
141
142
146
146
152

CONTENTS

IX

Estimating demand
Optimum construction outlay
The intensity of site use
The amount that can be paid for the site
Building higher versus building wider
The choice of development project
Summary

154
158
159
161
163
165
165

Redevelopment
The timing of redevelopment
The value of the cleared site
The rate of redevelopment
Renovation or clearance?
The effect of a change in the rate of interest on the
rate of redevelopment
The effect of a change in building costs on redevelopment
Other factors affecting the pace of redevelopment
Summary

166
166
168
170
172
173
174
176
176

9 Development Finance
Principles of financing real property development
Short-term finance
Longer-term development finance
Long-term investment finance
Summary

178
178
181
183
186
190

10 Urban Regeneration and Urban Problems

Urban growth
Advantages and disadvantages of cities
Optimum city size
The problem of 'overspill'
Green belt land
;
New towns
Eco-towns and future overspill
Problems of urban areas
Problems of inner-city areas
,
Policies for renewal of inner-city areas
Pollution
Control of pollution
Pollution control policies
Conservation
Urban traffic
Policy for traffic congestion
Summary

191
191
194
196
197
199
201
203
204
206
207
211
212
214
217
221
229
230

CONTENTS

11 Cost-benefit Analysis of Development Projects

UK public-sector development
The role of cost-benefit analysis (CBA)
The principles of CBA
Difficulties with CBA
Choosing the appropriate discount rate
Use and limitations of CBA
A cost-benefit study of a third runway and sixth
v
terminal at Heathrow airport
. _..
Summary

232
232
233
234
239
249
252

12 The Economics of Planning Regulation

The rationale for planning regulation
Dealing with externalities
The planning procedure
Specific planning issues
Criticisms of planning regulation
The impact of planning regulation
Summary

257
257
258
264
265
271
273
278

13 The Economics of the Construction Industry

The nature of the construction industry
Conditions of demand and supply in the construction industry
Pricing in the construction industry
The structure of the construction industry
Builders' merchants
Labour in the construction industry
Productivity in the construction industry
Innovation in the construction industry
Standardization and 'industrialized building'
Summary

279
279
281
283
287
288
291
293
297
300
306

14 Sustainable Development and 'Green Building'

A sustainable built environment
The contribution of housing to carbon emissions
Greening the existing housing stock
Green commercial real estate
.
Summary

307
307
311
314
326
328

15 Contaminated Land and Brownfield Development

The problem of contaminated land
Contaminated land in the UK
Contaminated land in Europe
Contaminated land in North America

330
330
331
338
340

254
255

CONTENTS

Brownfield development
Valuation of contaminated land sites
Summary
Part IV

XI

341
344
346

Real Estate Investment

16 Investment in UK Land and Property

Real estate investment
Real estate investment characteristics
Investors in real estate
"
Investment asset yields
Property yields
Asset yields since 1960
The effect on the real property market of the demand
for land resources as an investment
Summary

349
349
352
358
363
368
371

17 The UK Commercial Property Market

The market for commercial property
The interlinked nature of commercial property markets
The UK commercial property market 1950-89
The UK commercial property market 1990-2010
Summary

377
377
379
382
387
391

18 International Real Estate Markets

International property investment
The growth of international real estate investment
The real estate market in the USA
The real estate market in India
The real estate market in Japan
The real estate market in China
Real estate markets in central and eastern Europe
UK property and globalization
Post credit crunch international property investment
Summary

393
393
395
398
399
400
402
403
404
406
408

Part V

373
375

The Government and Real Estate

19 Regional Policy in the UK and Europe

The European Union
The EU and real estate
The eurozone
UK regional policy in the context of the EU
Summary

413
413
414
418
422
424

Xii

CONTENTS

20 The Impact of Government Policy on Real Estate

Cyclical instability
Monetary policy
Fiscal policy
The role of the government in economic growth
and distribution of income
The monetary policy response to the credit crunch
recession in the UK
Summary
_ -.-

425
425
428
430

21 Government Ownership of Real Estate

The provision of goods and services by the public sector
Public-sector expenditure
Borrowing to finance public expenditure
User-charges to finance public expenditure
User-charges and price discrimination
Taxation to finance public expenditure
Private finance initiatives (PFI)
Government ownership of real estate
Summary

439
439
441
442
443
446
447
453
455
459

22 Taxation of Real Estate

The structure of taxation
Direct taxation and real estate
The impact of Value Added Tax (VAT) on real property
Local taxes based on property
Present finance of local government in the UK
The future of local authority finance
Summary

460
460
462
469
471
481
485
486

References

489

Index

433
434
437

495