REAL ESTATE ECONOMICS

The Real Estate Sector: The Capital and Property

Markets
What comprises the real estate sector?
#1 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 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.
Types of Real Estate
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.
Review of Economic
Concepts
What are the different economic concepts?
1. 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.
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.
The law of supply says that at higher prices, sellers will
supply more 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.
Costs and Benefits
A cost-benefit analysis 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 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.
INCENTIVES
Economic incentives 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.
Where does the real estate fail?
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.  Affordability is fueled by not only
low wages and rising mortgage rates
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.
Bigger demand for co-working spaces- According
to a BusinessWorld report, there are 1.3 million
freelancers in the Philippines as of March 2018, and
the figure continues to grow. This market will be
looking for workspaces designed with connectivity and
flexibility in mind, presenting a challenge to property
developers and businesses in this particular niche to
fill the gap.
MICRO AND MACRO
ECONOMICS
Differences between Micro 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. 
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.
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.
Location and Rents:
The Indifference Principle
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.
How does it apply to location and rents?
An indifference curve is a graph that shows 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.
What are the submarkets?
Submarkets in Real Estate- Accumulation of housing
units deemed substitutable by homogeneous
households, such as those having comparable
attractiveness and usefulness.
How are lands being segregated?
Laws that ensure rational land use and sustainable urban and
regional development
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.
Memorandum Circular No. 54 – prescribing the guidelines of Sec.
20, R.A. 7160, authorizing cities/municipalities to reclassify lands
into non-agricultural uses.
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. 
What is residential development, its goal
and objectives?
Residential development means any development on
private land that provides living accommodations for one or
more persons. This category includes, but is not limited to:
single- family homes, multi-family homes, condominiums,
and apartments.
Residential development and residential re-development is a
process that seeks to improve upon an existing neighborhood.
Some of the benefits of development include safe living
environments, happier communities, healthier economic
growth, and better sustainable building practices.
Development at a residential scale allows for a certain amount
of care and responsiveness at a community level.
Why is it considered the highest use of the
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.
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.
Location, Land Use And Density
Land Use - 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.
"Location, location, location" is a common mantra in
real estate.
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.
Density- in real estate means the intensity of land use.
Urban density is a term used in urban planning and 
urban design to refer to the number of people
inhabiting a given urbanized area. As such it is to be
distinguished from other measures of 
population density. Urban density is considered an
important factor in understanding how cities function.
Research related to urban density occurs across diverse
areas, including economics, health, innovation,
psychology and geography as well as sustainability.
TRANSITION BETWEEN
LAND USES
(Gentrification)
What is gentrification?
Gentrification is defined as the transformation of a
city neighborhood from low value to high value.
Gentrification is also viewed as a process of urban
development in which a neighborhood or portion of a
city develops rapidly during a short period. This
process is often marked by inflated home prices and
displacement of the neighborhood's previous
residents.
How does it contribute to residential
development?
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.