What follows are some of my notes from a unit I studied years ago on Urban Economics.
Note well - the unit (and these demand and supply factors) was focussed on LAND (not property in terms of houses, units etc), however many of the factors would seem to be applicable to the latter.
Under a different name (Urban Land Development), the Urban Economics unit that I studied is a core unit of a Town Planning degree certified by the Royal Australian Planning Institute.
Possible determinants of the demand for urban land.
1. Income - the disposable (after tax) income of prospective buyers. "Demand" means desire backed by purchasing power, not just desire alone.
2. Price - the term "demand" should always be considered "the quantity demanded at a given price".
3. Cost and availability of finance - high interest rates will reduce the amount of borrowings that purchasers can afford, thus depressing the demand for land (not comments re: supply of land).
4. Demographic features of the population - The size of the population (in relation to a given area of land), age distribution, rate of household formation, rate of natural increase, immigration and emigration, geographical distribution, internal migration, etc., will have an effect on the demand for land.
5. Physical characteristics of the site - size, gradient, sub-soil, vegetation, prevailing winds, views, etc.
6. Proximity to amenities - Schools, shops, parks, sporting facilties, transport facilities, etc.
7. Proximity to employment opportunities
8. Rental opportunities - A thriving rental market might raise the value of land above that which could be obtained in a predominantly owner-occupied area.
9. Multiple occupancy - if planning laws permit higher density housing, then the land value may increase
10. Inflation and the expectation of inflation - the expectation of future inflation (or capital growth) will make people less unwilling to pay higher prices
11. Government grants, eg. FHOG, etc. The actual outcome (whether or not it is better for buyers) depends on whether it is a buyers' market or a sellers' market, eg. on the elasticities of supply and demand.
12. Re-zoning or the prospect of re-zoning - Huge increases in land values often occur when land is re-zoned from a lower to a higher use, eg. from farming to residential or from residential to industrial. The expectation of a future re-zoning will promote an upward trend in land values, accelerating as the actual re-zoning approaches.
13. Zoning restrictions - the value of land will tend to rise if the amount of land zoned for a particular purpose in a particular area is less than the amount required for that purpose in that area.
14. The state of the economy - land prices, like the prices of other commodities will be affected by the general state of the economy, eg. by the affluence of the population, employment (and unemployment), CPI, and wealth and income factors.
15. Superannuation and retirement schemes - Lump sum payments can boost the market for land as such money is often invested in real estate.
16. Neighourhood effects - Surrounding developments etc. can affect the value of a property. For example, the construction of a busy road, an airport or a factory could reduce land values. Conversely, the construction of a bridge, development of a recreational park, or the closure of a street to through traffic could raise land values.
Possible determinants of the supply for urban land.
1. Physical features - the supply of land is affected by phyisical features such as rivers, mountains and land gradients.
2. Density of development - physical limitations on the supply of land can be offset to tome extent by more intensive development
3. Time period - any talk of the "supply" of land must occur within the context of a time period. In the very short run the supply of land coming onto the market is relatively fixed. Over a longer time period there will be some flexibility in the supply of urban land, and the supply will tend to be more responsive to changes in prices.
4. Substitution between uses - even though the total supply of land might be fixed, the supply of land for one particular use (eg. residential) could be increased by transferring land from other uses (eg. recreational and industrial).
5. Allotment stocks - the rate at which the supply of residential allotments can be increased in response to an increase in demand will depend on the size of the current stock of vacant allotments and of the motivations of the owners of those allotments.
6. Speculation - On the one hand it is argued that speculators, by withholding land from the market or by only allowing it to 'trickle through' in small quantities, force land prices up and expolit the end users of land. On the other hand, it is argued that speculators perform a useful role in the urban land market: they assist in the operation of the price mechanism by ensuring that sites are allocated to the highest bidder and thus put to their 'highest' use, and by investing funds and taking risks they faciltate the development process.
7. Monopolies and restrictive practices - the supply of urban land coming forward onto the market at any given time, place and price (as distinct from the quantity of zoned land already in existence) can be affected by the degree of concentration of ownership and / or by restrictive agreements (explicit or implicit) between owners.
8. Development costs - The costs of development and of the projected profits to the developer can affect the supply of urban land. Developers will, of course, attempt to pass these costs onto consumers but their success in doing so is limited by the price elasticity of demand.
9. Administrative delays - Developers frequently argue that a major contributing factor to the high price of developed sites is the time taken to obtain the required approval from many departments. It is also the case that in some instances the requirements of departments can (and have been) contradictory.
10. Taxes and land rates - As an example, high levels of land tax and rates have the potential to discourage people from holding large amounts of land and could therefore encourage them to bring that land onto the market.
11. Interest rates - needless to say, high interest rates tend to reduce the demand for land and hence reduce land prices. However, high interest rates tend to raise the cost of financing development - thus forcing prices up. The net result is difficult to predict as it will depend upon the relative strengths of opposing forces. Depending on the ability to raise rents, higher interest rates also have the capacity to decrease the value of rental property because, if rents cannot be increased, the higher interest rates will reduce the present value of expected rents; and lending money at high interest rates could become more profitable than investing in rental property.
12. Government charges - eg stamp duties. Owners and developers will try to pass these charges on to the buyers, thus tending to raise the supply price of land, but as in the case of taxes the precise incidence (who pays in the end) is not clear (it depends upon the slope of the demand curve, among other things).
13. Death duties - With no death duties in Australia, the need to sell land to pay a tax liability is greatly reduced.
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So, OP - how do you get an efficient market out of all of that?
You don't, do you?
In case anyone is wondering, I'd posted this very list on SS almost 11 years ago - so I haven't had to re-type it.
