MARY GRACE VILLANUEVA SAGON

Bachelor of Science in Real Estate Management

REAL ESTATE ECONOMICS

Real estate economics is the application of economic techniques to real estate

markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The
closely related field of housing economics is narrower in scope, concentrating on residential
real estate markets, while the research on real estate trends focuses on the business and
structural changes affecting the industry. Both draw on partial equilibrium analysis (supply and
demand), urban economics, spatial economics, basic and extensive research, surveys,
and finance.

In this article, the components and different factors affecting Real estate economics will
be explored. Firstly, we must look into the sectors comprising the real estate business as well as
their respective purposes, namely:

1. Real Estate Development

Real estate development is a process that involves the purchase of raw land,
rezoning, construction and renovation of buildings, and sale or lease of the finished product
to end users. Developers earn a profit by adding value to the land (creating buildings or
improvements, rezoning, etc.) and taking the risk of financing a project. Development firms
create a new product, which can be thought of as the “primary market” or generation of new
inventory.

2. Sales and marketing

Sales and marketing firms work with developers to sell the buildings and units they
create. These firms earn a commission for creating all marketing material and using their
sales agents to sell the inventory of completed units. These firms typically focus on new
units.

3. Brokerage

A real estate brokerage is a firm that employs a team of real state agents (realtors)
who help facilitate a transaction between the buyers and sellers of property. Their job is to
represent either party and help them achieve a purchase or sale with the best possible
terms.

4. Property management

Property management firms help real estate owners rent out the units in their
buildings. Their jobs include collecting rent, showing units, fixing deficiencies, performing

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repairs, and managing tenants. They charge a fee, typically a percentage of the rent, to
property owners.

5. Real estate lending

Lenders play a major role in the industry as virtually all properties and
developments use leverage (debt) to finance their business. Lenders can include banks,
credit unions, private lenders, and government institutions.

6. Professional services

There are a variety of real estate professionals who work in the industry and help
make it function. The most common examples (other than the ones listed above) are
accountants, lawyers, interior designers, stagers, general contractors, construction workers,
and tradespeople.

In going into the business of real estate, it is likewise important to understand how
the market to which the real estate will be traded into behaves. There are some known key
concepts in economics that play a part in its movements.

One of those concepts is Scarcity. Scarcity refers to the basic economic problem,
the gap between limited – that is, scarce – resources and theoretically limitless wants. This
situation requires people to make decisions about how to allocate resources efficiently, in
order to satisfy basic needs and as many additional wants as possible. Any resource that
has a non-zero cost to consume is scarce to some degree, but what matters in practice is
relative scarcity. Scarcity is also referred to as "paucity." Scarcity is when the means to fulfill
ends are limited and costly. Scarcity is the foundation of the essential problem of
economics: the allocation of limited means to fulfill unlimited wants and needs. Even free
natural resources can become scarce if costs arise in obtaining or consuming them, or if
consumer demand for previously unwanted resources increases due to changing
preferences or newly discovered uses.

The next concept is the famous Law of Supply and Demand. The law of supply and
demand is a theory that explains the interaction between the sellers of a resource and the
buyers for that resource. The theory defines what effect the relationship between the
availability of a particular product and the desire (or demand) for that product has on its
price. Generally, low supply and high demand increase price and vice versa.  The law of
demand says that at higher prices, buyers will demand less of an economic good. These
two laws interact to determine the actual market prices and volume of goods that are traded
on a market. Several independent factors can affect the shape of market supply and
demand, influencing both the prices and quantities that we observe in markets.

Another important concept which is most likely used to understand or analyse the
buyer’s spending behaviour. This is the Costs and Benefits concept. As a tool in economics,
it is commonly called the cost-benefit analysis. It is a process businesses use to
analyze decisions. The business or analyst sums the benefits of a situation or action and
then subtracts the costs associated with taking that action. Some consultants

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or analysts also build models to assign a dollar value on intangible items, such as the
benefits and costs associated with living in a certain town. A cost-benefit analysis (CBA) is
the process used to measure the benefits of a decision or taking action minus the costs
associated with taking that action. A CBA involves measurable financial metrics such as
revenue earned or costs saved as a result of the decision to pursue a project. A CBA can
also include intangible benefits and costs or effects from a decision such as employee
morale and customer satisfaction.

On one hand, there are also what we call the Economic incentives. These are what
motivates you to behave in a certain way, while preferences are your needs, wants and
desires. Economic incentives provide you the motivation to pursue your preferences.

Knowing these concepts, we can now look into the problems faced by the real
estate industry, specifically in the Philippines. Based on research, there are multiple
challenges that can be enumerated. Among which is the rising interest rates and the
weakening peso. When inflation rates are high, the Central Bank attempts to manage its
effects by increasing interest rates. Higher interest rates make it more expensive to borrow
money, which reduces the amount of money circulating in the market. This, in turn, will
eventually slow down the rise in prices.

While increasing interest rates may prompt real estate developers to increase
mortgage rates and discourage potential buyers, fund managers are confident that banks
could not raise mortgage rates immediately and in full because the market is very
competitive.

The lack of Housing Affordability across nearly every income bracket with the
exception of the most wealthy households also confronts the real estate industry. 
Affordability is fueled by not only low wages and rising mortgage rates

Another is energy and water, natural resources important to property and quality of
life, yet threatened by not only environmental damage (man-made and climatological), but
entangling state and local regulations which complicate development and lack the
standardization national regulations would provide.

Economics can be studied using two different views, namely, Micro-economics and
Macro-economics. Macroeconomics is the study of the performance, structure, behavior and
decision-making of an economy as a whole. Macroeconomists focus on the national,
regional, and global scales. For most macroeconomists, the purpose of this discipline is to
maximize national income and provide national economic growth. Economists hope that this
growth translates to increased utility and an improved standard of living for the economy’s
participants. On the other hand, Microeconomics deals with the economic interactions of a
specific person, a single entity, or a company. These interactions, which mainly are buying
and selling goods, occur in markets. Therefore, microeconomics is the study of markets. The
two key elements of this economic science are the interaction between supply and demand
and scarcity of goods.

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 Microeconomics and macroeconomics both focus on the allocation of scarce
resources. Both disciplines study how the demand for certain resources interacts with the
ability to supply that good to determine how to best distribute and allocate that resource
among many consumers.

Microeconomics studies the behavior of individual households and firms in making

decisions on the allocation of limited resources. Another way to phrase this is to say that
microeconomics is the study of markets.

Macroeconomics is generally focused on countrywide or global economics. It

studies involves the sum total of economic activity, dealing with the issues such as growth,
inflation, and unemployment.

There are some economic events that are of great interest to both
microeconomists and macroeconomists, but they will differ in how and why they analyze the
events.

In economics, there is a concept called Indifference Principle. This refers to the

proposition that unless people are special in some way, nothing can make them happier
than the next best alternative. So, when they have to choose between two different choices,
people prefer one over another until a point when they turn indifferent to both. This happens
when the marginal utility that they derive from the initial choice drops gradually until it equals
the utility derived from the alternative. A child, for instance, might prefer chocolates to ice
cream until he has had too many chocolates. The indifference principle was proposed by
American economist Steven Landsburg in his 1993 book The Armchair Economist.

By using a graph applying the indifference principle, it will show a combination of

two goods that give a consumer equal satisfaction and utility, thereby making the consumer
indifferent. Indifference curves are heuristic devices used in
contemporary microeconomics to demonstrate consumer preference and the limitations of a
budget. Recent economists have adopted the principles of indifference curves in the study
of welfare economics.

Submarkets in Real Estate- Accumulation of housing units deemed substitutable

by homogeneous households, such as those having comparable attractiveness and
usefulness.

Speaking of lands, we must also look into the laws governing the classification and
segregation of lands in the Philippines. Laws that ensure rational land use and sustainable
urban and regional development are the following, namely:

1. Executive Order No. 72 – providing for the preparation and implementation of
the Comprehensive Land Use Plans (CLUPs) of Local Government Units
pursuant to the Local Government Code of 1991 and other pertinent laws.
2. Memorandum Circular No. 54 – prescribing the guidelines of Sec. 20, R.A.
7160, authorizing cities/municipalities to reclassify lands into non-agricultural
uses.

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 3. Executive Order No. 124 – establishing priorities and procedures in evaluating
areas for land conversion in regional agricultural/industrial centers, tourism
development areas and sites for socialized housing.

The application process for land use conversion from agricultural to residential,
commercial or industrial uses, involves the Department of Agrarian Reform, Department of
the Interior and Local Government, Department of Agriculture, Housing and Land Use
Regulatory Board, National Housing Authority, and Housing and Urban Development
Coordinating Council.

There are several types of real estate, each with a unique purpose and utility. The
main categories are the following:

Residential real estate includes both new construction and resale homes. The most

common category is single-family homes. There are also condominiums, co-ops,
townhouses, duplexes, triple-deckers, quadplexes, high-value homes, multi-generational
and vacation homes.

Commercial real estate includes shopping centers and strip malls, medical and

educational buildings, hotels and offices. Apartment buildings are often considered
commercial, even though they are used for residences. That's because they are owned to
produce income.

Industrial real estate includes manufacturing buildings and property, as well as

warehouses. The buildings can be used for research, production, storage, and distribution of
goods. Some buildings that distribute goods are considered commercial real estate. The
classification is important because the zoning, construction, and sales are handled
differently.

Land includes vacant land, working farms, and ranches. The subcategories

within vacant land include undeveloped, early development or reuse, subdivision and site
assembly.

It has been said that residential land is the best use of land. History has proven
that the astute developers have made significant profits from residential developments.
Every developer will have their own financial goals, and this will be dependent on several
variables such as income, age, taxation, social status and so forth, but the underlying
principles remain the same, and that is success and wealth.

With almost every prosperous financial reward there is the element of risk, but with
property development, these risks can be calculated and analysed. Everybody needs a
home or some form of accommodation. Like a general commodity, there will always be a
demand for housing. As long as there are economic stability and population growth, this
demand will continuously increase. This gives the watchful entrepreneur an array of
development opportunities.

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 Residential developments can be lucrative, but the returns will be relative to the
scale of the project. Whether you are renovating a home or undertaking a retirement village
complex, there are many financial rewards in residential property developments.

Most residential developments require a smaller amount of capital to get started.

Depending on one’s financial position some lending institutions would not require a deposit,
and at times only 10% to 25% deposit is required to start. With residential, lending
institutions have the infrastructure and systems to make home loans more accessible for the
consumer to apply for.

Land use is the characterization of land based on what can be built on it and what
the land can be used for. It’s determining what sort of community, environment or settlement
can be used on a specific type of land. One definition of land use is “the total of
arrangements, activities and inputs that people undertake in a certain land cover type.” It’s
important to note that land use and zoning are not the same. Where land use is the way that
people adapt land to suit their needs, zoning is how the government regulates the land.

Also, a good location can mean different things to different people, of course, but
there are also objective factors that determine a home's value.

Appraisers consider a home's location when they determine property values. They
compare the home and land to similar properties within the same geographical area, which
is another reason why location is emphasized as much as it is when determining property
value.

A city neighborhood can be transformed from low value to high value. This is made
through a process called Gentrification. Gentrification often increases the economic value of
a neighborhood, but the resulting demographic change is frequently a cause of controversy.
Gentrification often shifts a neighborhood's racial/ethnic composition and average household
income by developing new, more expensive housing and businesses in a gentrified
architectural style and improving resources.

The gentrification process is typically the result of increasing attraction to an area

by people with higher incomes spilling over from neighboring cities, towns, or
neighborhoods. Further steps are increased investments in a community and the related
infrastructure by real estate development businesses, local government, or community
activists and resulting economic development, increased attraction of business, and
lower crime rates. In addition to these potential benefits, gentrification can lead to population
migration and displacement.

Resources:

https://www.lamudi.com.ph/journal/issues-affecting-the-philippine-real-estate-sector-this-2018/

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https://courses.lumenlearning.com/boundless-economics/chapter/differences-between-
macroeconomics-and-microeconomics/

https://www.indexmundi.com/philippines/land_use.html

https://www.realestateagent.com/real-estate-glossary/real-estate/submarket.html

https://thorntonls.com/services/land-segregation-and-subdivision/#:~:text=Construction
%20Services-,Land%20Segregation%20and%20Subdivision,create%20additional%20lots
%20or%20parcels.&text=There%20are%20numerous%20ways%20of,city%20handles%20them
%20varies%20greatly.

http://hlurb.gov.ph/law-issuances/land-use-planning/

https://www.ayrinternational.com.au/which-is-more-profitable-residential-or-commercial-
developments/

https://www.land.com/buying/guide-to-land-use-definitions/

https://www.investopedia.com/financial-edge/0410/the-5-factors-of-a-good-location.aspx

https://www.thebalance.com/what-location-means-in-real-estate-1798766#:~:text=Appraisers
%20consider%20a%20home's%20location,is%20when%20determining%20property%20value.

https://en.wikipedia.org/wiki/Gentrification