Module 1:Economics and the Real Estate Market

What does Property do?

-Space

-Wealth

-Collateral

How much % does it contribute to SA GDP

Underpins credit system because there’s less risk if Debtoer doesn’t pay,banks can just seize their asset and sell it

Explain the interactions between the overall Market outcomes

-Space Market

-Financial/Asset market

-Development market

-Land Market

• Rent is determined by tenants demands vs supply of space.

• Investors price ownership-Rent translates into value of the building (capitalisation rate)

• New space is built when the value of the building is more than the cost to build it

• Land is absorbed and priced as development increases

Define:

• Capitalisation Rate

• Land absorption

• Investors determine the market value of a building by how much rent(cash flow) is being/is expected to be paid and converts that into a single purchase price.Helps determine risk & return expectations

• When undeveloped land is now being used for construction projects

Is Urban economics and Real estate economics the same thing

No real estate economics focuses more on an asset/project level and producing space for specific purposes/people whereas urban economics is more macro,focusing on city growth and location choices(bid-rent-micro).

They overlap but real estate economics falls under urban economics

Why should we look at both urban and real estate economics

Markets adjust unevenly so with urban markets we can see what’s driving the different outcomes in property markets

Land is not a standard commodity(unique, fixed in supply, varies by location and quality)

What 4 questions to ask

• What

• How

• Who

• Where

- type of space

-density (@ what density)

-Which market segment

-Location

What is land (2)

• Factor of production(Land, labour, capital & entrepreneurship)

• Natural & renewable resources

Land was central in the olden days and now its more marginalized & reframed

Instituions that govern land in SA

• Muncipalities

• Deed registries

• SPLUMA

• Department of agriculture,land reform and rural development

What are the 4 key assumptions for neo-classical economics

• Actors

• Decisions

• Clearing

• Information

And what is the main thing with neo-classical economics

How scarce resources are effectivly allocated which is determined by the margin

Real estate markets adjust slowly and unevenly unlike financial markets,why?

(6 different things compared to other neo-classical models)

Neo-classical economics vs institutional economics

How real estate markets should work vs how they actually work

(Effcient,cleaning,rational vs Frication,rules,power)

Why do institutions decide outcomes

List the 4 main players in the property market and explain the flow chart

-Mortgage lender

-Government

-Tenant

-Equity investor

Name the 4 factors included in “Sustainable” development

Name 3 positive externalities and 3 negative externalities and what are the three policy responses to these

-SPLUMA

• What is homo-economicus

HOWEVER: Developers don’t really behave like homo economicus

• In behavioural economics what two things are done in terms of descisions

• a theoretical concept in economics that describes humans as perfectly rational, self-interested agents who always make choices to maximize their utility or profit

Explanations:

1)Decisions are processed: The psychological pathways, filters, and methods used to interpret data are what truly drive the outcome

2)Computational capacity: people possess a limited attention span and finite cognitive resources,(don’t function like computer resources can) they are physically and mentally unable to calculate every single risk, return, and potential future scenario in highly complex and uncertain property markets

3)Heuristics: These are simplified "rules of thumb" or mental shortcuts used to make decisions quickly and practically without needing to perform impossible calculations

GDP Growth drives demand for space in what 6 ways

• CPI-Consumer price index,average change over time in the prices households pay for a specific group of consumer goods/services

• Central banks increase interest rates to discourage borrowing and spending.Fixed-rate mortgages investors demand higher yields and lenders increase their rates to protect profit margins

What’s the asymmetry when it comes to firms and household demands

• Less people living in one household therefore more dwellings per person whereas weak GDP growth means firms aren’t growing in size

• Strong HH growth + Weak GDP growth

Why is property so interest rate sensitive

• 2.Real estate loses its appeal to investors (Property competes with bonds): Investors look for the best risk-adjusted returns. When interest rates rise, government bonds start offering higher yields. Because bonds are low-risk, investors will shift their money out of property and into bonds instead

• bps-basis points("Cumulative Cuts" of 150 bps means that the central bank lowered the interest rate (the repo rate) by a total of 1.50 percentage points between September 2024 and November 2025)

How is inflation good(3) for property and bad(3)

What does ____ mean:

-GFC

-GNU

• Global financial crisis

• Government of National unity(1st formed to transition SA from apartheid and then in ‘24 after no party won outright majority )

How has GNU affected the property market in SA

The formation of South Africa's Government of National Unity (GNU) has boosted investor and consumer confidence, helping to stabilize the currency and pave the way for economic recovery and interest rate cuts