UEMC2513 Building Economics and Finance

1. UEMC2513 Building Economics and Finance Introduction To Urban Land Economics

2. Learning Objectives After studying this topic you will: • be able to explain the concept of ‘economic rent’ • Show how a demand curve of land can be determined • Explain and illustrate how the interaction of demand and supply will lead to an equilibrium market price or rent • Explain the economic rationale for intensity of site use • Explain how the timing of redevelopment is an economic decision

3. Land • Undeveloped land, or ‘pure’ land, refers solely to natural resources and space. • Land as a whole i.e. the earth’s land surface – can be regarded as being fixed in supply. • Increasing such land by reclamation from the sea shall be view as an additional to capital goods rather than to land.

4. S N P D L P1 D1 M Economic rent Price ECONOMIC RENT Quantity of ‘Pure’ Land Demanded and Supplied O

5. The Pricing of Land • Price perform the vital function of rationing scarce supply among competing uses. • Supply of land can never be regarded as fixed from the viewpoint of any one use. • The productivity of land can usually be increased in response to additional demand by using it more intensively by the addition of capital. • Land as whole are entirely demand-determined– a tax on pure land has no disincentive effect on the supply of land

6. The Pricing of Land • Unless all forms of land use are taxed equally, the pattern of land use will be distorted • Whether such distortion is on balance good or bad can only be decided by: • A comparison with the inevitable distortions produced by alternative taxes • Its connection with spillover benefits and costs • One’s political views • Cost of production include normal profit – what is necessary to keep the entrepreneur in the current line of production

7. The Commercial Rent of Land • Commercial rent is simply a periodic payment for the hire of land. • Normally, there is competition for land between the different potential users. • The rent of land, therefore, is determined in the absence of any government interference, by the interaction of demand and supply.

8. The Demand of Land Assumptions: • The land under discussion is homogenous • Buyers are only interested in maximising private utility or money returns • Conditions of demand and supply do not change • A long-period situation prevails • The output at which profits are maximised is known

9. The Demand of Land • The demand for land as a factor of production is a derived demand • It has to be combined with other factors, labor and capital, to produce the goods that are wanted • The quantity of land which a firm demands depends upon: • its productivity • the price relative to other factors • the price of the final product

10. The Demand of Land Thee main problems have to be answered: • How does a change in the price of land relative to other factors affect the demand for land? • How will a change in the productivity of land in a particular use affect demand? • How will a change in the price of the product affect the demand for land in that use?

11. C A P EP20 M L The Optimum Combination of Factors of Production Capital (units) O Land (units)

12. Price of land rise More capital is now combined with less land Level of output has been reduced from 20 units to 10 units B Q EP10 E N The Optimum Combination of Factors of Production Capital (units) C A P EP20 M L O Land (units)

13. Increase in productivity The same output can be produced for a smaller outlay K R EP’20 S The Optimum Combination of Factors of Production Capital (units) C A P EP20 M L O Land (units)

14. Land has to be employed extensively EP10 The Optimum Combination of Factors of Production Capital (units) Price of land increase Quantity of land remained C A P EP20 H EP10 F E M L O Land (units)

15. Increase in demand More capital and more land would be demanded R EP30 F The Optimum Combination of Factors of Production Capital (units) C A P EP20 M L O Land (units)

16. The Demand of Land • A fall in the price of a factor will lead to an extension of demand (the demand curves slopes downwards) • An increase in productivity or an increase in the price of the product will lead to an increase in demand for the factor (the demand curve moves to the right)

17. Sl D1 Sm D Sm P1 P2 P3 P Supply, price and the time period Price (RM) O Quantity demanded and supplied (units)

18. The dominance of stock of real property on its price Demand for houses (determined by income, tastes, etc) Existing stock of accommodation Net annual new construction Prices of houses determines amount of new houses it is profitable to construct Determines the demand for, and prices offered for, building sites. Competition among developers ensures that any supernormal development profit tends to accrue to sellers of building sites in the form of higher land prices

19. A MC B Total cost of Capital MRP M Perfectly competitive factor market RM Economic Rent (surplus) C O Unit of capital

20. A MC B Total cost of Capital MRP M Perfectly competitive factor market RM Value of Site C O Unit of capital

21. A’ A C’ C B MRP’ MRP M M’ Effect of changes in the productivity • the price bid will be for the best use of the site. • The alternative use with greater productivity would shown by the higher MRP’ curve RM • A higher building and a higher site price will result from a rise in the MRP of capital • The higher the land price, the more intensive use of the land is required. High land prices have caused high buildings • Competition will ensures that the site is developed upwards to the point where MR=MC where A’BC’ is maximum O Unit of capital

22. A i C C’ i’ MRP M M’ Effect of changes in the rate of interest • A fall in the interest would lower the cost of each capital unit. RM • The price of site will rise from AiC to Ai’C’ O Unit of capital

23. Operating Costs Expected net annual return for any given year Expected gross annual returns Z N Gross annual returns and operating costs over time Expected gross annual return and operating cost (£) O Years

24. Present value of building in its existing use Z The present value of a land resource over time Present value (capitalised future NARs) in existing use P (£) O Years

25. PV of current highest and best use Deduct cost of clearing site B A Cost of rebuilding Value of cleared site R - The value of cleared site PV of current highest and best use, costs of clearing site and of rebuilding O Years

26. Value of cleared site Secures land and building in existing use Retains land and building in existing use Z T R PV of existing use - Redevelopment The timing of Redevelopment PV of existing use + value of cleared site O Years

27. Factors influencing Land Value • Supply and demand • The permitted use • Location • Physical characteristics • Availability of public services • Form of title • General nature of the surrounding

28. Site Characteristics • Soil conditions • Groundwater • Contours • Contamination • Obstructions • Services • Access • Aspect • Site boundaries • Area of site