INTRODUCTION
In law, property is defined as the highest right a man can have to anything, being that right which one has to lands or tenants, goods or chattels which does not depend on another’s courtesy. Also, it has three connotations: right of ownership, the object of ownership, and valuable things. Appraisal perceives property as importing unto itself all these ingredients, both in law and common usage, namely, tangible, intangible, and rights; ownership; monetary value; and legal assertion. In valuation, property can be defined as corporeal and incorporeal, tangible and intangible things, capable of pecuniary and legal assertion, over which ownership gives control.
The important items of market intelligence are the conditions of demand and supply, the price levels and their trends, the availability of credit, the interest rates payable on loans and the rates of return expected by the market on equity investment.
Meanwhile, it is helpful if details of estate ownership can be obtained so that possible sources of future supply to the property market can be taken into account. This kind of information is needed more by estate surveyors who have the responsibility of the forward planning considering their market operations and by the valuer who is mainly interested in short-term fluctuations. Market figures are usually historic and have little relevance to current trading which tends to look forward to the near future, but they are valuable in so far as they disclose wider trends and patterns which can be interpreted in terms of estate policies.
The unique characteristics of the real estate market must be accommodated. These characteristics include:
Durability - Real estate is durable. A building can last for decades or even centuries, and the land underneath it is practically indestructible. Because of this, real estate markets are modeled as a stock/flow market. About 98% of supply consists of the stock of existing
Meanwhile, it is helpful if details of estate ownership can be obtained so that possible sources of future supply to the property market can be taken into account. This kind of information is needed more by estate surveyors who have the responsibility of the forward planning considering their market operations and by the valuer who is mainly interested in short-term fluctuations. Market figures are usually historic and have little relevance to current trading which tends to look forward to the near future, but they are valuable in so far as they disclose wider trends and patterns which can be interpreted in terms of estate policies.
The unique characteristics of the real estate market must be accommodated. These characteristics include:
Durability - Real estate is durable. A building can last for decades or even centuries, and the land underneath it is practically indestructible. Because of this, real estate markets are modeled as a stock/flow market. About 98% of supply consists of the stock of existing
houses, while about 2% consists of the flow of new development. The stock of real estate supply in any period is determined by the existing stock in the previous period, the rate of deterioration of the existing stock, the rate of renovation of the existing stock, and the flow of new development in the current period. The effect of real estate market adjustments tend to be mitigated by the relatively large stock of existing buildings.
Heterogeneous - Every piece of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information asymmetry and greatly restricts substitutability. To get around this problem, economists (beginning with Muth (1960)) define supply in terms of service units, that is, any physical unit can be deconstructed into the services that it provides.
Olsen (1969) describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a new building. The market equilibrating process operates across multiple quality levels.
Further, the real estate market is typically divided into residential, commercial, and industrial segments. It can also be further divided into subcategories like recreational, income generating, area, historical/protected, etc.
High Transaction costs - Buying and/or moving into a home costs much more than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the purchase price. In some countries in Continental Europe, transaction costs for both buyer and seller can range between 15 - 20%. In Nigeria is much higher.
Long time delays - The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply, and also due to the relatively slow rate of change of demand. Because of these lags there is a great potential for disequilibrium in the short run. Adjustment mechanisms tend to be slow, relative to more fluid markets.
Both an investment good and a consumption good: Real estate can be purchased with the expectation of attaining a return (an investment good), or with the intention of using it (a consumption good), or both. These functions can be separated (with market participants concentrating on one or the other function) or can be combined (in the case of the person that lives in a house that he owns). This dual nature of the good means that it is not uncommon for people to over-invest in real estate, that is, to invest more money in an asset than it is worth on the open market.
Heterogeneous - Every piece of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information asymmetry and greatly restricts substitutability. To get around this problem, economists (beginning with Muth (1960)) define supply in terms of service units, that is, any physical unit can be deconstructed into the services that it provides.
Olsen (1969) describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a new building. The market equilibrating process operates across multiple quality levels.
Further, the real estate market is typically divided into residential, commercial, and industrial segments. It can also be further divided into subcategories like recreational, income generating, area, historical/protected, etc.
High Transaction costs - Buying and/or moving into a home costs much more than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the purchase price. In some countries in Continental Europe, transaction costs for both buyer and seller can range between 15 - 20%. In Nigeria is much higher.
Long time delays - The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply, and also due to the relatively slow rate of change of demand. Because of these lags there is a great potential for disequilibrium in the short run. Adjustment mechanisms tend to be slow, relative to more fluid markets.
Both an investment good and a consumption good: Real estate can be purchased with the expectation of attaining a return (an investment good), or with the intention of using it (a consumption good), or both. These functions can be separated (with market participants concentrating on one or the other function) or can be combined (in the case of the person that lives in a house that he owns). This dual nature of the good means that it is not uncommon for people to over-invest in real estate, that is, to invest more money in an asset than it is worth on the open market.
Immobility: Real estate is locationally immobile (save for mobile homes, but the land underneath them is still immobile). Consumers come to the good rather than the good going to the consumer. Because of this, there can be no physical market-place. This spatial fixity means that market adjustment must occur by people moving to dwelling units, rather than the movement of the goods. For example, if tastes change and more people demand suburban houses, people must find housing in the suburbs, because it is impossible to bring their existing house and lot to the suburb (even a mobile home owner, who could move the house, must still find a new lot). Spatial fixity combined with the close proximity of housing units in urban areas suggest the potential for externalities inherent in a given location.
The objectives of this unit are:
The real estate market appears disorganized in comparison with market for stocks and bonds. Much of this situation arises from the unique nature of real property as a commodity. The property market characteristics responsible for its uniqueness and the disorganized nature are as follows:
Every property is unique in terms of location, size, accommodation, design and construction. There are often elements of sentimental attachments of the property owners to their properties. Property ownership might be seen as being synonymous with social status. Litigation, which is a common feature of properties, could put properties under such circumstances as out of market at least temporary. The genuiness of the seller’s title takes both time and effort to be determined by way of searches. It is easier to tax real estate than personal property. The character of the neighbouhood and economic outlook affect value of any specific property. Value of real properties is often affected by changes in local zoning laws.
The property market performs five inter-related functions which are:
OBJECTIVES
The objectives of this unit are:
- Explain the property market terminology
- Examine sources of information on property
Property market
Real property market otherwise known as real estate market is defined as any medium where bundle or cluster of rights is being exchanged. It could also be a system of transaction between landowners, land users and estate agents. The property market is the sum total of all the smaller and larger markets operating in different types of interests in land and buildings. This implies separate markets exist for every type of property that involves different groups of buyers and sellers. It must be noted that the object of sale or purchase in the property market is the interest in land or landed properties such as freehold, leasehold, easement, profit and license. In other words, property market is a medium through which ownership rights and/privileges are transferred from one person to another.The real estate market appears disorganized in comparison with market for stocks and bonds. Much of this situation arises from the unique nature of real property as a commodity. The property market characteristics responsible for its uniqueness and the disorganized nature are as follows:
- Localized competition: one physical characteristic of real property as a commodity is its fixity or immobility. This means it cannot be moved from one area to another in response to changes in supply and demand conditions. Heterogeneity is yet another physical characteristic of property which entails that a potential buyer must inspect each property of interest to fully understand its merits. Fixity and heterogeneity act to limit competition between properties. Values therefore depends more on local demand.
- Stratified demand: people generally acquire or use property for specific purpose, for example, the market for detached buildings may be very high, the market for flats may be very low.
- Decentralized location: due to lack of standardization and unique geographical locations of real estate, potential buyers need to visit each property of interest which often involves traveling over a long distances. Agreements are drawn up and signed in places of convenience as well as actual payments.
- Confidential transactions: property market participants usually meet in private and their agreed prices are not freely disseminated. Only people closely associated with the market have relatively direct easy access to price and value information because of the confidential nature of the transactions.
- Relatively uninformed participants: most private buyers and sellers engage in sales transaction only once every several years with little or no knowledge of real estate. There is no central source from which information could be purchased. As such the agreed price may reflect differences in negotiating ability of the buyers and sellers as well as the relative merits of the property involved.
- Inelasticity of supply in the short run: Another important characteristic of real property is that supply is relatively fixed over a period of a few years. This is in view of the fact that it takes several weeks, months or even year to erect new structures, convert existing properties or even construct new improvements. Apart from the fact that elements (weather), physical, legal and financial obstacles retard expansion of supply in response to sharply increased demand.
Every property is unique in terms of location, size, accommodation, design and construction. There are often elements of sentimental attachments of the property owners to their properties. Property ownership might be seen as being synonymous with social status. Litigation, which is a common feature of properties, could put properties under such circumstances as out of market at least temporary. The genuiness of the seller’s title takes both time and effort to be determined by way of searches. It is easier to tax real estate than personal property. The character of the neighbouhood and economic outlook affect value of any specific property. Value of real properties is often affected by changes in local zoning laws.
The property market performs five inter-related functions which are:
- Allocates existing land resources by price mechanism in the absence of external pressure.
- Redistributes the existing land resources in accordance with changes in supply and demand.
- Determines the price (value) of land resources by the interplay of supply and demand
- Determines the level and nature of capital improvement to be carried out on land
- Determines the appropriate use to which the land resources should be put.
SELF ASSESSMENT EXERCISE 1
- Discuss in detail the characteristics of the property market.
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