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 Acknowledgements xiii xviii xix Part I The Economic Framework 1 The Scope of Economics 3 Why we need to study real estate economics 3 The economic problem: limited resources but unlimited wants 5 The market economy 9 The command economy 11 The mixed economy 11 Positive and normative economics 12 Microeconomics and macroeconomics 16 Sustainable development 17 The limitations of economics 18 Summary 19 2 Economic Efficiency 20 Welfare and economic efficiency 20 Conditions necessary for Pareto optimality 21 Achieving the conditions of economic efficiency 26 Conditions necessary for economic efficiency through the price system 29 Weaknesses of the price system 32 The allocation of real estate resources 34 Summary 34 Part II Land and Property in the Economy 3 Real Estate Markets 39 Why'real estate'? 39 Real property rights 40 The real property market 42
Viii CONTENTS Are real estate markets efficient? 45 Dealings in real property interests 50 Functions of the real property market 51 Summary 56 4 Land and Property Price Determination 58 Land as a whole 58 The commercial rent of land 60 The equilibrium market price or rent. 63 Non-homogeneous land and economic rent 63 The pricing of land resources 64 The dominance of stocks over flows 65 The price of land and property 69 Building costs and property prices 70 Tax implications of economic rent 71 Summary 73 5 Residential Property Markets 75 The provision of housing through the market economy 75 Housing policy 80 UK government intervention in the housing market 82 Household tenure in the UK 90 The credit crunch and UK residential property 104 Future provision of housing 106 Overview of residential property markets 111 Summary 111 6 The Cyclical Nature of Real Estate Markets 113 Business cycles and property cycles 113 The UK real estate market 1945-79 116 The UK real estate market 1980-9 119 The UK real estate collapse 1989-91 122 The UK real estate market 1991-9 124 The market boom, 2000-7 130 The credit crunch recession, 2007-10 132 Summary 137 Part III Property Development 7 The Development Process 141 The nature of development 141 Functions of the developer 142 The rationale for development 146 Choosing between development projects 146 Allowing for risk and uncertainty 152
CONTENTS IX Estimating demand 154 Optimum construction outlay 158 The intensity of site use 159 The amount that can be paid for the site 161 Building higher versus building wider 163 The choice of development project 165 Summary 165 8 Redevelopment 166 The timing of redevelopment 166 The value of the cleared site 168 The rate of redevelopment 170 Renovation or clearance? 172 The effect of a change in the rate of interest on the rate of redevelopment 173 The effect of a change in building costs on redevelopment 174 Other factors affecting the pace of redevelopment 176 Summary 176 9 Development Finance 178 Principles of financing real property development 178 Short-term finance 181 Longer-term development finance 183 Long-term investment finance 186 Summary 190 10 Urban Regeneration and Urban Problems 191 Urban growth 191 Advantages and disadvantages of cities 194 Optimum city size 196 The problem of 'overspill' 197 Green belt land ; 199 New towns 201 Eco-towns and future overspill 203 Problems of urban areas 204 Problems of inner-city areas, 206 Policies for renewal of inner-city areas 207 Pollution 211 Control of pollution 212 Pollution control policies 214 Conservation 217 Urban traffic 221 Policy for traffic congestion 229 Summary 230
X CONTENTS 11 Cost-benefit Analysis of Development Projects 232 UK public-sector development 232 The role of cost-benefit analysis (CBA) 233 The principles of CBA 234 Difficulties with CBA 239 Choosing the appropriate discount rate 249 Use and limitations of CBA 252 A cost-benefit study of a third runway and sixth terminal at Heathrow airport v. _.. 254 Summary 255 12 The Economics of Planning Regulation 257 The rationale for planning regulation 257 Dealing with externalities 258 The planning procedure 264 Specific planning issues 265 Criticisms of planning regulation 271 The impact of planning regulation 273 Summary 278 13 The Economics of the Construction Industry 279 The nature of the construction industry 279 Conditions of demand and supply in the construction industry 281 Pricing in the construction industry 283 The structure of the construction industry 287 Builders' merchants 288 Labour in the construction industry 291 Productivity in the construction industry 293 Innovation in the construction industry 297 Standardization and 'industrialized building' 300 Summary 306 14 Sustainable Development and 'Green Building' 307 A sustainable built environment 307 The contribution of housing to carbon emissions 311 Greening the existing housing stock 314 Green commercial real estate. 326 Summary 328 15 Contaminated Land and Brownfield Development 330 The problem of contaminated land 330 Contaminated land in the UK 331 Contaminated land in Europe 338 Contaminated land in North America 340
CONTENTS XI Part IV Brownfield development 341 Valuation of contaminated land sites 344 Summary 346 Real Estate Investment 16 Investment in UK Land and Property 349 Real estate investment 349 Real estate investment characteristics 352 Investors in real estate " 358 Investment asset yields 363 Property yields 368 Asset yields since 1960 371 The effect on the real property market of the demand for land resources as an investment 373 Summary 375 17 The UK Commercial Property Market 377 The market for commercial property 377 The interlinked nature of commercial property markets 379 The UK commercial property market 1950-89 382 The UK commercial property market 1990-2010 387 Summary 391 18 International Real Estate Markets 393 International property investment 393 The growth of international real estate investment 395 The real estate market in the USA 398 The real estate market in India 399 The real estate market in Japan 400 The real estate market in China 402 Real estate markets in central and eastern Europe 403 UK property and globalization 404 Post credit crunch international property investment 406 Summary 408 Part V The Government and Real Estate 19 Regional Policy in the UK and Europe 413 The European Union 413 The EU and real estate 414 The eurozone 418 UK regional policy in the context of the EU 422 Summary 424
Xii CONTENTS 20 The Impact of Government Policy on Real Estate 425 Cyclical instability 425 Monetary policy 428 Fiscal policy 430 The role of the government in economic growth and distribution of income 433 The monetary policy response to the credit crunch recession in the UK 434 Summary _ -.- 437 21 Government Ownership of Real Estate 439 The provision of goods and services by the public sector 439 Public-sector expenditure 441 Borrowing to finance public expenditure 442 User-charges to finance public expenditure 443 User-charges and price discrimination 446 Taxation to finance public expenditure 447 Private finance initiatives (PFI) 453 Government ownership of real estate 455 Summary 459 22 Taxation of Real Estate 460 The structure of taxation 460 Direct taxation and real estate 462 The impact of Value Added Tax (VAT) on real property 469 Local taxes based on property 471 Present finance of local government in the UK 481 The future of local authority finance 485 Summary 486 References 489 Index 495