R2 Property and Capital Market 06

R2 Property and Capital Market 06 - HKU Real Estate Finance...

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HKU Real Estate Finance Lecture 2: Property and Capital Markets: A Theoretical Framework K. S. Maurice Tse, The University of Hong Kong, School of Economics and Finance
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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 rental income 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 entertainment. 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.
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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R2 Property and Capital Market 06 - HKU Real Estate Finance...

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