Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Property Economics Mid-Semester Review Instructions 2022 Dr Amity James Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Mid-Semester Review Wednesday 6th April 2022 (Week 6) 15:00-16:30pm Elizabeth Jolley Theatre (Building 210 Floor 101) Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J During the Review 10 MC questions + 5 short answer questions Total 50 marks Covers material weeks 1 – 5 inclusive Time available: 70mins Deferred Assessment – submit an application for an assessment extension Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Mid Semester Test – Revision checklist Real estate market characteristics Space and asset markets Determinants of demand Determinants and sources of supply Housing stocks and flows Property market cycles Macroeconomics Fiscal and monetary policy Functions of the real estate market Investment in real estate Capitalisation rates Investment Risk 4Q Model (covered in Week 5) Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Multiple Choice Questions 10 multiple choice questions, 1 mark per question Answer in the booklet provided Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Short Answer Questions 5 Short answer questions (8 marks each) Use theory and illustrate with an example Think about what the question is asking List Describe Explain Make sure you answer the question Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Example questions Q1. Using Supply and demand diagrams describe the impact of a rise in interest rates on a) the demand for owner occupied housing and b) the demand for rental accommodation. D D1 Demand shifts as interest rates mean fewer buyers can afford to buy. Demand shifts from D to D1 and prices fall D D1 Move to renting houses so demand shifts from D to D1 and rents rise. Housing switches from the owner occupier to rented market S S Owner Occupier Market Renting Market – inferior good P R H RH P1 R2 H1 RH2 Interest rates were used to control the booming property market from 2005-2008 before being cut in response to the economic crisis. Their effectiveness was limited in the boom period due to the strength of demand. Discuss a little bit Give an example Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q2. Describe 3 reasons why the commercial property market is not a perfectly competitive market. Real Estate Market differs from a perfect competition market in the following ways (you would only need to describe 3 of these) Properties are heterogeneous and because no two properties are the same they all have different values, unlike shares in a company which are all identical. Demand changes can therefore affect properties very differently. Low and irregular transaction volume meaning it is difficult to gather consistent information on transactions to establish price. For some commercial transactions there may be no comparable information available. Less than rational consumers and producers. An tenant may pay above the ‘market’ price in order to obtain a property in a specific location. Developers tend to operate in herd like behaviour which can prevent profit maximisation as competition forces up the price of land. Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q3. Harvey and Jowsey describe 6 functions of the real estate market. Describe 2 of these in detail. The 6 functions are Allocate existing real estate resources and interests Indicate changes in demand for land resources Induce supply to adjust to changes in demand Indicate changes in the conditions upon which land resources can be suppled Induce demand to respond to changes in the conditions of supply Reward owners of land resources Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q4. Illustrate how the elasticity of supply can have a dramatic impact on property price changes following a shift in demand. In the very short run (now) supply is fixed (Sm). In the short run supply can be altered through refurbishment etc (Ss). Eventually supply can be increased by adding to fixed capital (new development) (S1). if demand increases it has different impacts on price depending upon how long the market has to respond. D Sm P Ss D1 S1Pm Ps P1 If demand shifts then the greater the elasticity of supply then the smaller the impact on prices. In the long run demand shifts have less of an impact on prices and the market can respond by increasing supply. To get full marks you would need to provide an example of a market where prices rose very quickly in the short term due to a shift in demand and an inelastic supply curve e.g. Perth office market 2006- 2008 where demand increase significantly due to the resources sector but there was no new supply coming on to the market so the vacancy rate plummeted and prices accelerated accordingly. Developers were attracted into the sector by the potential profits so a supply response followed in the short run. Discuss a little bit Give an example Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q5. The real estate space market essentially consists of two separate but interlinked markets. Describe these two markets with reference to real estate demand and supply. Property Market – property as space – demand for space from occupiers – (tenants). Capital market – property as an investment asset – supply of space from landlords (investors).. Explain how investors supply space which is consumed by tenants. Use examples to explain. Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q6. Explain the difference between an economic boom, a period of steady growth, a recession and a depression. Boom – Period of strong GDP growth e.g rising house prices, falling unemployment, rising investment but rising inflation – rising AD Steady growth – modest but sustained GDP growth e.g. modest rises in house prices just above inflation, inflation stable or rising very slowly, output slowly increasing, employment strong – slowly rising AD Recession – two quarters of negative GDP growth e.g. rising unemployment, falling house prices, falling output, cuts in interest rates to stimulate demand, inflation falling Depression – a year of negative GDP growth e.g. mass unemployment, rapidly falling house prices, in drop in AD and a fall in output, falling inflation. Discuss a little bit Needs an example Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q7. How do changes in interest rates affect aggregate demand Reduction in interest rates shift AD to the right because more disposable income, reduce cost of borrowing etc increasing GDP but also prices. Costs of Borrowing Lower rates reduce cost of borrowing. Cheaper to obtain finance to purchase a house or finance a development project. More investment and general spending as credit cheaper. Increases AD Cash Flow Lower loan repayments so more disposable income increasing AD. Firms have more money to invest in new premises for example. More cash to pay dividends Asset Prices Increase in asset (e.g. houses) prices due to an increase in demand and supply is always slow to respond due to planning and construction lag. Increase in wealth due to house price increase so more spending. Consumption and investment expenditure increase Exchange Rate Depreciation in value of $ as Australia less attractive to invest in due to lower interest rate return. Exports cheaper but imports more expensive Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Q8 Illustrate, using examples, the three types of property investment risk. 1. Market Risk Are risks that arise as the result of market changes. For example an decrease in demand for resources would shift the demand for office property to the left as businesses may reduce their consumption of space and there is less competition for space. This could result in an oversupply of property and vacancies reducing rents, rental growth and returns. Capital growth would also be affected. Demand slowed during the GFC in the Perth office market reducing rents and therefore returns. Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J 2. Financial Risks If an investor has borrowed funds to purchase property but interest rates rise, the borrower may not be able to make repayments and may default on the loan. This has financial implications for both the lender and borrower. A rise in interest rates may also make it more expensive for a borrower to renew loan finance and a development project may collapse. This was evident during the GFC where there was a big rise in distressed development assets. 3. Property Risks Risk that affects an individual property and may arise from changes to the locality, the building or tenants. For example, returns for local shops are affected by the opening of a new shopping centre. Accelerated depreciation due to technical changes may result in vacancies for example poor environmental performance. A poor quality tenant may default leaving a vacant property. Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J To prepare: Go through all lecture notes on blackboard including the supplementary material and workbook Listen to i-lectures Complete all readings Do additional reading to get real life examples eg newspapers, office market reports Curtin University is a trademark of Curtin University of Technology CRICOS Provider Code 00301J Good luck!
