ECONOMIC FUNDAMENTAL OF REAL ESTATE MARKET

ESV Irori, Samuel

1.1    INTRODUCTION

Dennis J. Mackenzie and Richard M. Betts (2008) defined market as a place where buyers and sellers meet to bargain and exchange goods and services at negotiated prices. They further stated that market is a place where buyers and sellers meet to exchange items of value.

In the words of Iyoha M.A. et al (2003), A market is an arrangement, institution or mechanism to brings together the seller(s) and buyer(s) for exchange of particular resources (goods and services).

Real Estate refers to the bundle of rights inherent in the ownership of a property. It is the rights or interest a person derives in the ownership of a property.

Dennis J. Mckenzie and Richard M. Betts (2008) defined Real Estate as land, that which is fixed to the Land, that which of appurtenant to the land, and that which is immovable by law. This implies that real estate refers to land and improvements on land as well as the rights associated with the ownership of same. In a nutshell, real estate is property in the form of land and buildings rather than personal possession.

Real Estate Market in the words of Olusegun K.G. (2000) refers to any medium where the “bundle or cluster of rights” are been exchanged. The item of exchange in the Real Estate Market therefore is the interests in land (landed properties) such as freehold, leasehold, license, easement and profit.

Thus, Real Estate Market is a medium through which ownership rights and/ or privileges are transferred from one person (seller) or another (buyer) at a particular time and agreed price.

2.1    FUNCTION OF THE REAL ESTATE MARKET

As earlier stated, the Real Estate Market is a medium by which the seller and the buyer exchange the bundle or cluster of rights. The Real Estate Market performs the following function.

(i)   It redistributes the available land resources (landed properties) in accordance with changes in supply and demand.

(ii)   It allocates available land resources (landed properties) by price mechanism in the absence of external pressure.

(iii)  The Real Estate Market determines the price (value) of land and landed properties by the interplay of supply and demand.

(iv) The Real Estate Market help us to ascertain the appropriate use to which land resources (landed properties) should be put.

(v)  Finally, it determines the level and nature of capital improvement to be carried out on land.

3.1       CHARACTERISTICS OF REAL ESTATE MARKET

As earlier stated, the Real Estate Market is a medium by which the bundle or cluster of rights are exchanged between a willing seller and a willing buyer at an agreed price. What is exchanged or traded in the Real Estate market is the bundle of rights inherent in the real estate (property).

Some of the characteristics of the Real Estate market includes:

i)    Heterogeneity: Every unit of real estate is unique in terms of its location and possible differences in design, size, condition, and its financing. This makes pricing difficult, increases search cost, creates information in commensurability (i.e lack of a common measure between one or two real estate) and greatly restricts substitutability.

ii)    High Cost of Transaction: The incidental costs of dealing in the Real Estate Market are high relative to those of other markets. These costs include investigation of title cost, real estate fees, legal fees, land transfer taxes, deed of registration fees etc.

iii)   Lack of Central Market: The Real Estate Market is decentralized. It is bought and sold through Estate Agents acting in, and familiar with a particular locality.

iv)  Immobility: Real Estate is locationally immobile. This explains why there is no physical market place for real estate. Fixity in location causes the Real Estate Market         to be extremely vulnerable to shifts in local demand.

v)   Long Time Delays: The market adjustment process is subject to time delays due to length of time it takes to finance, design, and construct new supply and also to the relatively slow rate of change of demand.

vi)  Durability: Real Estate is durable. A real estate (landed property)        can last for decades or even centuries and the land underneath it is practically indestructible. Because of this, Real Estate Markets are modelled as a stock/flow market. The stock of real estate supply in any period is determined by the existing stock in the previous period, the rate of deterioration of the existing stock, the rate of renovation of the existing stock and the flow of new development in the current period. The effect of Real Estate Market adjustment tends to be mitigated aby the relative large stock of existing building.

vii)  Paucity of Market participants: The number of participants in the Real Estate Market is limited by finance. In otherwords, not all would love to purchase real estate are rich enough to buy a landed property.

4.0 ECONOMIC FUNDAMENTALS OF REAL ESTATE MARKET

Real Estate Market is a system of transaction between property owners, property user (prospective buyer) and Estate Agents. An understanding of the operation of the Real Estate Market is essential as it makes the buyer or seller to be more empowered. Understanding the fundamental of Real Estate Market help the buyer to determine his/her negotiating and purchasing power. To the seller, it can assist him/her price your home and anticipate the number of offers and selling timeline. Understanding these economic market fundamentals empowers both buyers and sellers to make smarter decisions about buying or selling a real estate.

The Economic fundamentals of Real Estate Market are anchored on the operation of Demand and Supply. According to Hyatt Diccon (2022), understanding the basic economic principle of demand and supply can help consumers decide the best time to buy or sell their properties. Knowing the forces at play can help real estate brokers and agents prepare for and respond to them as well.

The economic fundamentals of Real Estate Market includes demand and supply of real estate.

4.1    DEMAND

Ekenta E. (2015) defined the demand for land (real estate) as the totality of land for land and building which people want and are willing to buy, lease or let at a specified price and at a given period of time, all other factors being equal. While Iyoha M.A. et al (2003), defined Demand for a commodity as the units of the commodity an economic agent (individual, household, a firm or even a nation) is willing and able to buy at a given price, at a point in time. Iyoha M.A. et al (2003) further stated that demand can be considered to be “the propensity to buy”.

The Law of Demand states that with all things being equal, when the price of a good rises, the quantity demanded falls and when the price falls, the quantity demand rises.

An increase in demand for real estate will generally have the following consequences on the real estate market:

a)    An increase in demand will reduce existing real estate vacancies, be it a built up properties or properties available for sale.

b)    The reduction in vacancies will be followed by an increase in rents and prices assuming no rent controls, as more people continue to bid for the fixed supply.

c.    As the demand pushes rent and prices up, a point is reached at which developers and investors, motivated by profit potential, are drawn into the construction market.

d.    Assuming favourable economic and government conditions, new construction takes place slowly, and the supply of real estate increases gradually.

e.    As this new construction overtakes the increase in demand, vacancies begin to rise, this in turn will cause a fall in rents and prices.

Likewise, a decrease in the demand for real estate will generally have these consequences.

1. A decrease in demand causes an increase in vacancies in apartments and a large number of unsold properties.

b)    The increase in vacancies will cause rents and prices to decline.

c)     With lower rents and prices, buyers can now obtain more properties at no increase in costs. This may absorb the vacancy but if not, the continued vacancy will eventually force property owners to abandon their properties.

d.     The Real Estate Market will remain in this state until demand once again increases.

4.2.   CAUSES OF CHANGES IN DEMAND

Changes in real estate demand are caused by a number of factors such as:   

(i)     Changes in population

(ii)     Changes in income

(iii)    Availability of finance (mortgage credit)

(iv)   Employment

(v)    Location

i)   Changes in population: When the population of an area increase, there will be increase in the demand for real estate and vice versa should there be decrease in population.

ii)  Changes in Income Level: The higher and more regular the income of the working populace, the more the demand for real estate (landed properties) and vice versa.

iii)  Availability of Finance: The availability of mortgage credit at a minimal interest rate and the ease of borrowing (obtaining loan) will have a great influence on the demand for real estate.

iv) Employment: Good and well paid employment directly affects positively on the demand for real estate. When new jobs are created and employers offer employees higher pay, people fell economically more secured and better able to purchase real estate. On the other hand, when the economy is sluggish, so is real estate. Job losses and declining wages tent to depress the demand to buy real estate.

v)  Location: All things being equal, real estate (landed properties) in prime locations or areas are highly demanded either for lease or purchase.

4.3    SUPPLY

Dennis J. Mckenzie and Richard M. Betts (2008) defined supply as the total quantity that sellers ae willing to sell at a given time and certain prices. Iyoha M.A. et al (2003) stated that supply defines a relationship between the quantity of a commodity offered for sale and the prices of the commodity. They considered supply to mean Producers “propensity to Sell”.

In real estate market, supply is fixed in the short run and cannot respond quickly to changes in market conditions. A fixed supply implies that real estate prices fluctuate with demand. The supply curve slopes upward reflecting the Law of Supply which states that sellers and producers will offer more real estate for sale as prices increases and fewer as prices decrease.

4.4    CAUSES OF CHANGES IN SUPPLY

(i)            Price of Real Estate: The higher the price of real estate, the larger the number of available real estate (landed properties) for sale by prospective sellers and vice versa all things being equal.

(ii)           Existing Stock and New Construction: New construction expands supply of real estate to the market. Newly built real estate typically cost more than the comparable resale of real estate. This is because new construction comply with current building codes for safety and structural soundness, requires less maintenance in the near time and are usually more energy efficient than the existing stock.

(ii)           Construction Cost: Construction Cost is another indicator of the state of the real estate market. When there is a rise in construction price (cost) because of the expensive raw material cost and a shortage of skilled labour, sales price pf real estate increases. High construction cost implies a higher replacement cost, making both new and existing building more value. As a result, we typically see rents and sales price soaring high alongside the construction prices (cost).

(iv) The State of technology: Technology is a crucial determinant of supply because it affects supply directly and also influence other determinants of supply. An improvement in technology will improve the efficiency of the production process which means reduction in the production cost, a fall per unit price, and greater scope for profit making. All things being equal, therefore, technological improvement in the construction of real estate would increase the supply of real estate.

5.1    CONCLUSION

The market is the way in which an economic activity is organized between buyers and sellers through their behaviour and interaction with one another. The interaction of buyers and sellers in the market helps to determine the market price, thereby allocating scarce goods and services efficiently.

The Real Estate Market brings together the prospective seller and prospective buyer to carry out exchange involving the bundle or cluster of rights (interests) inherent in a real estate.

The economic fundamentals of Real Estate markets are basically the demand and supply of real estate. An understanding of the economic indicators or fundamental helps the investor, property owner and prospective buyers in determining the position of the real estate and assist them for decision making. It guides investors, property developers, real estate consultants on the best time to buy or sell properties.

ESV Irori, Samuel is a Warri-based registered Estate Surveyor and Valuer