theory about real estate prices

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Real Estate Prices Oskari Öhman Valkea-Marina


Supply

Demand

Price

How prices of products or services are defined?


What is price of a property?

Imbalance in interpreting prices Seller has distorted idea of market and his/her own property (cognitive disonance) Buyer tries to justify prices down The real estate prices in micro-level are result of two parties agreeing on price of a particular property

  What is price of a property X?   Price of property X can be 100.000 € for José,

but 120.000 € for Roosa (prices are prone to subjectivity)


Who is the most beautiful? Psychological factors which play a part in defining the Real-Estate Prices


PROPERTY PRICES BASICS

  A property has rarely exact substitution. For example, a can of Coca-Cola vs. Pepsi, or Orange vs. Mandarin

  Property prices are not directly related to production cost (think about building which is 100 years old; it has been “capitalized” many times vs. production price)


Different Multipliers for Property Prices (indicative)

0.4 x 1 = 0.4 (Location; will be discussed further detail) 0.2 x 1 = 0.2 (Overall Economic Situation and Employment etc.) 0.2 x 1 = 0.2 (Cost of Construction and Land) 0.1 x 1 = 0.1 (Expected Value of Investment) 0.1 x 1 = 0.1 (Real Interest Rates) Presented Multiplier as indicative and result of various sub-factors Change in one Multiplier will cause a change in one or more variables. Higher change in a Multiplier does not translate in constant change. For example; 3 % increase in real interest rates can cause -5 % effect in demand, while an increase of 6 % in real interest rates may cause -20 % decrease in demand. Summa samarium: Price elasticity is not a sum of constants


FLUCTUATIONS IN REAL ESTATE PRICES (speculative variables)


FLUCTUATIONS IN REAL ESTATE PRICES

Real Variables   Employment level   Income level   Accumulative Capital   Interest Rates (Real Interest Rates)   Birthrate, Immigration and Emigration   Supply of New Properties   Circulation Speed of Properties   Currency fluctuations (Euro overvalued?)


Time Scale and Real Estate Prices

1) Short Term: Days, Weeks and Months → Speculative Effects and Other Unexpected variables (changes in laws and regulations + money market + war etc.) 2) Middle Term: Months and Few Years → Real- Effects such as general economic situation 3) Long Term: 5 Years and more → population growth. Note: One person will give more value for one home than two homes (summer house etc.) + Circulation Speed + Shifts in purchasing power (disparity in income distribution) and Shifts in society Note: if all Spanish 18-40 who still live at home would look for own home, that would increase demand for small aptos.


Multiplier effect on different areas. Elasticity of price increase/degrease depends very much of location

0,5 3

4,5

1,4

1,2

6

Imagine that there is a (+ or -) ”X-effect” in economy.


Real Estate Investing

Two Different Groups: 1)  Long term (lenders) 2)  Short Term (builders) Income on Real Estate Investment: rent - (interest + maintenance) = profit (taxable). Yearly profit ratio = rent x 12 / price of property. Good: 7 % (in real terms). Many investors are irrational: ”subjective valuation of properties” Rents are insensitive to react (short term crisis). Actually they can even react inversely

theory about real estate prices

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