AFX3355_TuteEx1_Soln - -1- AFX3355 Property Investment...

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- 1 - AFX3355 Property Investment Tutorial 1 GM Chapter 1: Q’s 1.1 – 1.8 and 1.16 Q 1.1 What is the real estate space market? What is the real estate asset market? Answer: Space market is the market for the usage , or the right to use, real property (land and build space) – sometimes referred to as the rental market (based on type of property) or the real estate usage market . The real estate asset market (also referred to as the property market) is the market for the ownership of property (real estate) assets. Property assets consist of real property, that is, land parcels and improvements on the land (buildings). Q 1.2 Draw and label a supply curve for real estate (income property) space, and explain why it is “kinked”. Answer: Q 1.3 What are the typical causes of a rising long-run marginal cost function in the space market for built space? Answer: The long run marginal cost (LRMC) function is the long run supply function in the market. It tells the cost of adding incrementally to the stock of supply in the space market. This is the cost of developing new buildings. This consists of construction cost plus land cost. Construction cost is typically about the same (in real terms) for the next building as for the last, in a given market (holding quality constant). So the cause of a rising LRMC function is typically increasing land cost, in other words, increasing scarcity of land. This, in turn, will be caused by growth in demand for built space in the market combined with a lack of new buildable sites in the market. Lack of buildable sites can be caused by geographical, physical constraints (such as an
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- 2 - island or mountains), or by legal or political constraints (such as zoning or environmental controls). The kink occurs at the point where the LRMC of supplying additional space is equal to the marginal revenue. If demand for built space changes, rents will adjust to reflect these changes which, in turn impacts on the return to those who invest in these assets. Buildings last a very long time, possibly more than 50 years, which means that the
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This note was uploaded on 05/18/2008 for the course AFX 3355 taught by Professor John during the Three '08 term at Monash.

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AFX3355_TuteEx1_Soln - -1- AFX3355 Property Investment...

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