Real estate economics

This is the application of economic techniques to real estate markets. It tries to describe, and predict patterns of real estate prices, building production, and real estate consumption. The related field of housing economics is narrower in scope, concentrating on residential real estate markets. Both draw on partial equilibrium analysis, urban economics, spatial economics, and finance.

The main participants in real estate markets are:

Owner/User : both owners and tenants. They purchase houses or commercial property as an investment and also to live in or utilize as a business.
Owner : These people are pure investors. They do not consume the real estate that they purchase.
Renter : These people are pure consumers.
Renovators : These people supply refurbished buildings to the market.
Developers : These people prepare raw land for building which results in new product for the market.
Facilitators : Includes banks, real estate brokers, lawyers, and others that facilitate the purchase and sale of real estate.
The owner/user, owner, and renter comprise the demand side of the market, while the developers and renovators comprise the supply side.

Durability : Real estate is durable. A building can last for decades or even centuries, and land underneath is practically indestructible. Because of this, real estate markets are modeled as a stock / flow market. Around 98% of supply consists of stock of existing houses, while around 2% consists of flow of new development.
Heterogeneous : Every piece of real estate is unique, in terms of 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.
High Transaction costs : Buying or moving to 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 a seller typically range between 8 - 10 % of the purchase price.
Long time delays : The market adjustment process is subject to time delays due to length of time it takes to finance, design, and construct new supply, and also due to relatively slow rate of change of demand.
Both an investment good and a consumption good : Real estate can be purchased with expectation of attaining a return, or with the intention of using it, or both. These functions can be separated or can be combined.
Immobility : Real estate is locationally immobile.

Demand for housing
The main determinants of the demand for housing are demographic. However other factors like income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes and price of compliments all play a role.

Supply of housing
Housing supply is produced using land, labour, and various inputs such as electricity and building materials. The quantity of new supply is determined by the cost of these inputs, the price of the existing stock of houses, and the technology of production.

Real estate Index