uemc2513 building economics and finance introduction to urban land economics

UEMC2513 Building Economics and Finance

Introduction To Urban Land Economics

© Chia Fah Choy 2005

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


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.


ECONOMIC RENT

O

Pric

e

Quantity of ‘Pure’ Land Demanded and Supplied

D

P1

P

Economic rent

N

L

D1

S

M


• 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

The Pricing of Land


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


• 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.

The Commercial Rent of Land


The Demand of LandThe 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


The Demand of LandThe 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



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?


L

C

EP20

Land (units)

Capital (units)

M

A

The Optimum Combination of Factors of Production

O

P


Capital (units)

EP20

M

A


LO

C

P

Price of land rise

EP10

B

N

Q

E

More capital is now combined with less land

Level of output has been reduced from 20 units to 10 units

Land (units)


Capital (units)

EP20

M

A


LO

C

P

Increase in productivity

EP’20

KR

S

The same output can be produced for a smaller outlay

Land (units)


Capital (units)

EP20

M

A


LO

C

P

Price of land increase Quantity of land remained

EP10

E

Land has to be employed extensively EP10

Land (units)

HF


Capital (units)

EP20

M

A


LO

C

P

Increase in demand

More capital and more land would be demanded

EP30

F

R

Land (units)



• 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)


Quantity demanded and supplied (units)

Sm

D

P

O

D 1

P1

Sm

P2P3

Sl

Supply, price and the time periodPrice (RM)


The dominance of stock of real property on its price

Demand for houses Demand for houses (determined by (determined by

income, tastes, etc)income, tastes, etc)

Existing stock Existing stock of of

accommodationaccommodationNet annual Net annual

new new constructionconstruction

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


O Unit of capital

RM

M

Perfectly competitive factor market

MRP

A

C

Total cost of Capital

Economic Rent (surplus)

B MC


O Unit of capital

RM

M

Perfectly competitive factor market

MRP

A

C

Total cost of Capital

Value of Site

B MC


O Unit of capital

RM

Effect of changes in the productivity

C

M

B

A’

MRP’

M’

MRP

A

C’

• 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

• Competition will ensures that the site is developed upwards to the point where MR=MC where A’BC’ is maximum

• 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


Effect of changes in the rate of interest

O Unit of capital

RM

C

M

i

M’

MRP

A

i’C’

• A fall in the interest would lower the cost of each capital unit.

• The price of site will rise from AiC to Ai’C’


O Years

Expected gross

annual return

and operating

cost (£)

Gross annual returns and operating costs over time

N Z

Expected gross annual returns

Operating Costs

Expected net annual return for any given year


O

Years

Present value

(capitalised future

NARs) in existing use

P (£)Present value of

building in its existing use

The present value of a land resource over time

Z


OYears

PV of current highest

and best use, costs of clearing site and of rebuilding

The value of cleared site

R

Cost of rebuilding

Deduct cost of clearing site

PV of current highest and best use

Value of cleared site

-

B

A


OYears

PV of existing

use + value of cleared

site

PV of existing use

The timing of Redevelopment

T

Retains land and

building in existing use

Secures land and building in existing use

Redevelopment

Value of cleared site

-

ZR


Factors influencing Land ValueFactors influencing Land Value

• Supply and demand

• The permitted use

• Location

• Physical characteristics

• Availability of public services

• Form of title

• General nature of the surrounding


Site CharacteristicsSite Characteristics

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


Labor LandTotal Labor

Marginal Product of

Labor Land

Total Product

Marginal Product

0 100 0.0 200 0.01 100 10.0 10.0 200 14.1 14.12 100 14.1 4.1 200 20.0 5.93 100 17.3 3.2 200 24.5 4.54 100 20.0 2.7 200 28.2 3.75 100 23.4 3.4 200 31.6 3.46 100 24.5 1.1 200 34.6 3.07 100 26.5 2.0 200 37.4 2.88 100 28.2 1.7 200 40.0 2.69 100 30.0 1.8 200 42.4 2.4

10 100 31.6 1.6 200 44.7 2.3


0

5

10

15

20

25

30

35

40

45

0 1 2 3 4 5 6 7 8 9 10

Labor

Ou

tpu

t

Y = (L, 100) Y = (L, 200) Poly. (Y = (L, 200)) Poly. (Y = (L, 100))

uemc2513 building economics and finance introduction to urban land economics

Documents

productivity of land

landundeveloped land

hire of land

demand curve of land

pricing of land price

price of land relative

forms of land use

pattern of land use