New Economic Thinking and Real Estate

Danny Myers

• Publisher: Wiley-Blackwell
• Year: 2016
• Print ISBN: 9781119048756
• eBook ISBN: 9781119048749
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

New Economic Thinking and Real Estate offers a modern and distinctive approach to forecasting and understanding property markets. With this book, students will develop an intuitive ability to interpret economic indicators and acquire the confidence to assess property markets. The book is divided into three parts: Part A: Resource choices - deals with microeconomics; Part B: Financial Systems - seeks to make sense of the macroeconomic scene and Part C: Measuring and Forecasting.

Part A
Resource Choices

---

1. Chapter 1 Basic Economic Principles
2. Chapter 2 The Language of Profit
3. Chapter 3 Real Estate Markets

---

Chapter 1
Basic Economic Principles

As the introduction and forward implied, the global financial crisis and subsequent recession raised some serious questions about the validity of mainstream economics and, in particular, its approach to the integration of financial systems and its unshakable belief in market forces and forecasting. As a result, those influenced by the new approach can be excused from being trained to comprehend elegant algebra or to manipulate large complicated mathematical sets and algorithms. This textbook is simply designed to introduce economics that will help the reader to understand the current business markets and government policies that operate in the real world, with specific reference to decisions to develop, own or invest in property.

As Professor Robert Lucas (2009), was keen to point out in defence of the subject: ‘One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September 2008. This is nothing new. It has been known for more than 40 years and is one of the main implications of the efficient market hypothesis, which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, then that formula would become part of generally available information and prices would fall a week earlier!’

In other words, Professor Lucas highlights that the economic world is far more complex than the physical world, as it is influenced by our beliefs about it, and this information is generally signalled through market prices. He does not seek to demean the discipline – he is aware of its limitations, but respectful of its insights.

As Chapter 3 and others in this text emphasise, market prices incorporate much information, but the intriguing aspect of the analysis is that they do not necessarily convey all information accurately, completely or transparently. There is room for differences of opinion and different perceptions of an uncertain future, as the art of interpretation and forecasting depends on intuition. Economics cannot be learnt by rote or by following hard and fast rules. It should certainly not be regarded as a narrow mathematical discipline, related solely to a study of costs or valuations that produce definite answers. Indeed, economics is a far broader subject than many anticipate, and an important aim of this chapter is to demonstrate that the core principles continue to influence the work of those engaged in finance, business, real estate and politics

Definition of economics

As Lionel Robbins’s (1932) classic statement captured it in his famous book on the Nature and Significance of Economic Science (published more than 80 years ago): ‘Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’. Thus, entrepreneurs – and that includes property developers – must learn to manage scarce resources. This simple-sounding idea, however, is far more complex than it first appears. Many of the world’s resources are finite, yet people have infinite wants. We are, in effect, faced with a two-pronged problem: at any point in time there is a fixed stock of resources, set against many wants. This problem is formally referred to as scarcity. In an attempt to reconcile this problem, economists emphasise that people must make careful choices – choices about what is made, how it is made, and for whom it is made; or, in terms of property, choices about what investments are made, how they may be constructed, and whether they should be developed for rent or purchase.

Intriguingly, the challenges facing the surveying profession have been presented in a similar way. As the Royal Institution of Chartered Surveyors (RICS) points out in their publicity blurb: the world is already overpopulated (growing at a rate of about 240 000 people a day) and everyone needs to be fed and housed – yet the earth’s resources are not infinite! According to the RICS, part of the solution to scarcity lies in the sustainable use of land and maximising the long term value of all kinds of property. Therefore, they highlight that the choices we make affect not only how we live today, but how others will live in the future.

What determines these choices are financial rewards, as every resource has an alternative use and, therefore, an alternative source of income. As economists like to emphasise, choosing one thing inevitably requires giving up something else. In making a choice, an alternative opportunity is missed. To highlight this dilemma, economists refer to the concept of opportunity cost – where the value of the foregone alternative becomes the focus of the decision. In other words, economics emphasises how every want that ends up being satisfied results in some other want, or wants, remaining unsatisfied.

To take a simple example, if a specific plot of land is used for residential purposes, it cannot also be used as farmland. This means that an important part of understanding property in an economic context involves recognising that we have to decide on the alternative uses made of the fixed amount of land available. This choice is informed by the level of returns paid and the risks involved. Unfortunately, social and environmental returns, and the greater wider good, are often overlooked.

In a nutshell, a key objective of economics is about achieving economic efficiency for the benefit of the greater good – or, to use a commonly quoted nautical metaphor, first used by John F Kennedy more than 50 years ago – to raise the tide that lifts all boats. The Great Recession, however, complicated this straightforward idea as the economy ebbed towards lower levels of economic activity and greater numbers of unemployed. By 2015, serious ethical and political questions ruled the day, such as: should we continue to allow self-interest and self-regulation to allocate resources; or should we recognise that social justice requires that we put an end to society’s excessive greed for profit and growth? Part of the new thinking highlighted that we cannot all be flooded with money at the same time. Extending the analogy the impact of the great recession has been somewhat selective – lifting a few gorgeous yachts, but leaving many smaller boats struggling to stay afloat.

To express the same sentiment in a political guise: to what extent should the taxpayer be expected to fund spending on public services, particularly those that effect the welfare of the typical man in the street? These dilemmas are currently being played out in all sectors of the economy and are exemplified by policy debates relating to the size of the state, and in resource decisions relating to property and housing. In terms of new economic thinking, an over-reliance on efficient markets and rational expectations should be avoided. As Kaletsky (2010: 181) pointed out: ‘The dream of creating a market system with no economic role for government ended on September 15, 2008’.

To sum up, then, about what constitutes the subject matter of economics. It appears that it emerges from questions about money, consumption, work, technology, markets, government policies – and, in the broadest sense, how things are produced. Sometimes there is also a concern about the ways that the incomes generated are distributed, although this has been largely overlooked for the last 200 years, since the work of David Ricardo.

Finally, to close this introductory section, it should be remembered that by defining economics in terms of its core principles, or subject matter, we are avoiding the debate about a preferred methodology. Remember, all we are trying to achieve is insight into a complex machine with many moving parts; we are not seeking universal truths or constant proof.

Resources (or factors of production)

Resources can be defined as the inputs used in the production of those things that we desire. Economists tend to refer to these resources as factors of production, to emphasise that, to produce any good or service, various factors need to be combined. Therefore, the total quantity, or stock, of resources that an economy has determines what can be produced. To construct real estate, for example, labour is required to develop a plot of land, and plant and equipment, which may be hired or bought, is required to facilitate the process. To put it another way, land and labour are always combined with manufactured resources to produce the things that are demanded.

When introducing property economics to groups of students, I often ask them to pause for thought and think of anything that can be produced without the involvement of these factors. The most common responses relate to ideas, thoughts, and decisions, and these answers enable me to distinguish economics from philosophy, psychology and business. The most intriguing answers to the question are suggestions relating to some ‘virtual’ activity based on digital technology – but these clearly still require people, equipment and a location to function from. In economic terms, they depend, like all economic goods, on using land, labour a...

Table of contents

• Cover
• Title Page
• Table of Contents
• Foreword
• Introduction: Setting the Scene
• Part A: Resource Choices
• Part B: Financial Systems
• Part C: Measuring and Forecasting
• Afterword
• Glossary
• Webnotes
• References and Recommendations
• Index
• End User License Agreement