Real Estate Economics Unit Four

Unit 4. Determinants of Land Value

1. Introduction

• Land Value: Critical in real estate economics and urban development; reflects worth of a specific land parcel.

• Determinants of land value are essential for:

  • Policymakers

  • Real estate investors

  • Urban planners

  • Individuals buying or selling property.

• Finite Resource: Land is fixed and immovable; value greatly influenced by external factors that vary by location and time.

• Supply and Demand: Price determined by demand alone, as per classical economists.

2. Economic Forces and Property Markets

• Alternative land uses impact land supply; it's not perfectly inelastic.

• Economic forces of demand and supply determine price/value of urban land.

• Importance for real estate investors:

  • Recognize fundamental forces shaping property markets and cities.

  • Understand differing locational needs of land use types.

• Land Use Intensity: Greater intensity expected in areas of higher land value.

3. Property Markets and Equilibrium Price Determination

• Exchange Economies: Modern economies characterized by exchanges, with property market defined as arrangements facilitating buyer-seller interactions.

• Demand and Supply:

  • Demand curve for real property is down-sloping.

  • Supply curve indicates quantity of property available for sale at various prices.

  • Equilibrium price occurs where demand meets supply.

• Property is demanded to achieve ends, such as:

  • Production capabilities

  • Services conducted

  • Profit generation.

4. Rent for Land

• Real property consists of:

  • The land itself

  • Improvements (buildings, etc.).

• Land units are unique based on:

  • Accessibility

  • Physical attributes

  • Legal restrictions

  • External influences.

• Classical Economists' View: Land rent viewed as tenant payment to landlord; rent is demand-determined due to fixed supply.

5. Neoclassical Economics Perspective

• Alternative Uses: Unlike Ricardo, neoclassical economists suggest land can have multiple uses.

• Neoclassical theory argues land receives due remuneration for various uses.

• Equilibrium in the Land Market:

  • Supply of land is fixed but can be influenced by demand shifts across different uses.

6. Bid-Rent Theory

• Demand for Access: City demand is influenced by accessibility which affects land values.

• The Bid-Rent Curve model illustrates how different land uses compete for locations based on commuting costs.

• Alonso’s Bid-Rent Theory:

  • Proximity to central business district (CBD) determines land rents and uses.

• Limitations: Model based on one linkage (commuting); real-life scenarios involve multiple linkages.

7. Theories of Urban Structure

1. Concentric Zone Theory: Cities grow in rings surrounding a CBD.

2. Sector Theory: Urban development occurs in sectors radiating out from the CBD rather than rings.

3. Multiple Nuclei Theory: Cities grow around multiple centers of activity, reflecting the complexity of modern urban life.

8. Impact of Technology and Transportation

• Changes in technology since 1930 have shifted employment centers away from CBDs.

• Advancements in various sectors have had profound effects on urban forms, affecting where urban activities are concentrated.

9. Conclusion

• Economic principles important in understanding land value and urban structure.

• Recognition of the role of accessibility, economic activities, and production factors is essential for appreciating land value dynamics.