K S Tse, The University of Hong Kong, 2
Property and Capital Markets
Real estate is a durable capital good. Its production and price are determined in an
asset/capital market. In this market, equilibrium is achieved when the demand to own real
estate assets must equal their supply. The price of houses depends on how many households
wish to own units and how many units are available for ownership. For instance, the value or
price of shopping center space depends on how many investors wish to own such space and
how many shopping centers there are available to invest in. Everything else held constant, an
increase in the demand to own these assets will raise prices, while a greater supply of space
will decrease price.
Supply of new real estate assets derives from the construction sector and depends on the price
of those assets relative to the cost of replacing or constructing them. In the long run, the asset
market should equate market prices with replacement costs that include the cost of land. In
the short run, however, the two may diverge significantly because of the lags and delays that
are inherent in the construction process.
A. What are the factors that affect the demand for owning real estate assets
to suddenly increase or decrease??
Are there factors other than simply the price of these assets? The other factor is the
that real estate assets can earn. What is rent?
To understand rent, we need to consider the market for the use of real estate. In the market
for real estate use of space (usu. Referred to as property market), demand comes from the
occupiers of space, whether they be tenants, owners, firms, or households.
For firms, space is one of many factors of production, and its use will depend on firm output
levels and the relative cost of space.
Households likewise divide their income into the consumption of many commodities, one of
which is space. The household demand for space depends on income and the cost of
occupying that space relative to the cost of other commodities, such as food, clothing, or
For firms or households, the cost of occupying space is the annual outlay necessary to obtain
the use of real estate-RENT. For tenants, rent is simply specified in a lease agreement. For
owners, rent is defined as the annualized cost associated with the ownership of property.
Rent is determined in the property market for space use, not in the asset market for ownership.