Governmental tax policies

For a decrease in demand the curve will shift to the left. This means the arrows in the above graph will point to the left. Changes in demand are normally caused by non-price determinants of demand. Some of the non-price determinants of demand include; expected price, price of other goods, income, number of potential consumers, and tastes and preferences. Supply Supply is a schedule which shows various commodities that businesses are willing and are able to offer for sale at various prices, all other factors being constant.

Supply in itself is the quantity that is available for sale, but it the schedule that indicates various prices and various quantities. Supply schedule and curve. When the price os a commodity increases, the supply of that commodity also increase. This means that the slope of the supply curve is upward sloping from left to right.. The law of supply The law of supply states that the price of a commodity is directly proportional to the quantity of that commodity supplied. Below is a hypothetical supply schedule and supply curve.

com Change in Quantity Supplied A change in Quantity supplied caused is only caused by a change in the price of the product. This is shown by a movement along the supply curve. Change in Supply A change in supply is indicated by a shifting in the supply curve. This is because there is a new supply schedule. The supply curve moves horizontally- either left or right, since the prices remain constant the quantities change (quantity is on the horizontal axis). A change in supply is caused by a change in the non-price determinants of supply such as.

For instance, non-price determinants push demand and supply from one equilibrium to another. This is referred to as ‘market equilibrium. ’ The equilibrium price is where the quantity demanded equals the quantity supplied. This can be expressed as; Qd=Qs Source:http://scribd. com demand and supply for housing In this section we focus on the demand and supply side factors that determine the value of properties in a market. Each housing transaction in the UK depends on (a) The price that the seller is willing to agree for their property with the prospective buyer

(b) The actual price that the buyer is willing and able to pay. Buyers place offers for a property that the seller can either accept or reject A Sellers Market When the market demand for properties in a particular area is high and when there is a shortage of good quality properties (i. e. supply is scarce) then the balance of power in the market shifts towards the seller. This is because there is likely to be excess demand in the market for good properties. Sellers can wait for offers on their property to reach (or exceed) their minimum selling price.

A Buyers Market Conversely when demand both for new and older housing is weak and when there is a glut of properties available on the market, then the power switches to potential buyers. They have a much wider choice of housing available and they should be able to negotiate a price that is lower than the published price. Source. http://www. tutor2u. com population of a given area may rise due to some factors. When this happens, there is an upward pressure on the market prices of housing. Often the supply of available housing in the market is relatively inelastic.

This is because there are time lags between a change in price and an increase in the supply of new properties becoming available, or other homeowners deciding to put their properties onto the market. When demand shifts outwards and supply is inelastic the result is a large rise in market price and a relatively small expansion of the quantity of houses traded. An article extracted from tutor2u(n. d) website, assuming the conditions of demand remain unchanged, as supply becomes more elastic over time we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold.

‘In evaluating a property’s value or potential worth, attention must be given to such matters on the demand side as population growth, personal income, and the tastes and preferences of people. On the supply side, one must look at the available supply of real estate housing and its relative scarcity. When the supply of real estate housing property is limited and demand is great, the result is rising land or housing property value prices.

Conversely, where land is abundant and there are relatively few buyers, housing supply and demand will be in check or balanced at only a few cents per square foot’ Nielsen (2007). George Lentz and Tse (n. d) stated that “the commercial real estate market is frequently observed to be in an extended state of disequilibrium”. A partial explanation for the tendency towards disequilibrium is found in the asset attributes of real estate, especially fixity of location, asset heterogeneity, long production times, asset durability and the costliness of real estate development and acquisition.

Further explanation is to be found in the characteristics of the commercial real estate market, especially long-term rental contracts and informational inefficiency. They added on by saying that lending policies of financial institutions and governmental tax policies can exacerbate tendencies towards extended periods of disequilibrium by providing signals to space producers which may or may not be congruent with signals related to changes in space demand.

To this literature this paper contributes a theoretical investigation of real estate supply adjustments in the commercial real estate market. Simple theoretical linkages between the goods market (the demand side) and the space market (the supply side) are developed and then used to explain the optimal supply decisions of space producers in response to exogenous shocks in the goods market. Optimization models are used to derive propositions relating to how space production decisions are made under conditions of demand certainty, demand uncertainty, and free entry.

Assuming tax policy and financial variables are held constant, although the models of optimal supply decisions developed below provide a framework for the analysis of capital market influences on the supply of space. The focus of the analysis is on how supply decisions in the space market are linked to production decisions in the goods market, assuming the absence of tax policy and financial innovation. The intent is to lay a theoretical foundation for a more extensive analysis of the process by which the supply of space adjusts to demand shocks.

The Relationship between the Goods Market and Space Market under Certainty We start an analysis by examining how the goods market interacts with the space market to determine the supply of space. The objective of this analysis is to model how the space market optimally adjusts to changes in space demand emanating from the goods market when demand is certain. To simplify the analysis, the space market is assumed to produce only one kind of space, and the space producer is also assumed to be the long-term property owner.

It is also assumed that the space market consists of structures, or units within structures. Thus asset value is the value of a structure. Following DiPasquale and Wheaton (1996), we further assume that space use and space ownership are separated, that the space user leases the space it needs from the space producer, and that the latter holds the property as an investment asset. Collapsing the construction and the ownership market into a single asset market implies that the developer is both the demander and the supplier of property assets.

This simplification allows us to focus directly on the relationship between goods production and space production decisions. As property owner (investor), the developer demands property as a capital asset, which is held for its expected investment return. The latter is determined by the future rental income that the developer expects to receive from the goods producer. As space producer, the developer produces property to meet its own demand for property assets, which is derived, in turn, directly from the property user’s (the goods producer’s) demand for space.

As the owner of property capital, the developer supplies the goods market, at the cost of rent, with the space resources (the property services) the goods producer demands as a factor input in its production process. If the wage rate and the rental rate are flexible, we shall observe an oversupply of space only momentarily, because the goods market, which continues to grow, will quickly absorb vacant space at the lower rental rate. The speed of rental-rate adjustment depends strongly on how property owners form expectations regarding future space demand.

This model is a perfect-foresight model, which implies that if the space market is frictionless, the rental rate will adjust instantaneously to the shock. However, even with perfect foresight, market frictions, such as contractual arrangements in place, search costs and other transaction costs, can impede the quick adjustment of the rental rate to changes in market conditions. The most important of the contractual provisions with respect to their influence on adjustment are the length of the rental contract and the fixity of the rental terms. Methodology

In carrying out the research, the researcher will have to employ various techniques to obtain data pertaining to demand and supply in real estate. They are summarized below: Primary data collection – this will be done by administering questionnaires to respondents, interviewing and observation Secondary data collection – efforts will be made to contact published data that indicate the prevalence of housing problems. Some of the secondary data include the internet, published journals and newspapers and text books. Conclusion This paper has developed a two-market framework for analyzing supply decisions in the commercial real estate market.

Theoretical linkages between the goods market and the space market are used to explain the optimal supply decisions of space producers in the commercial real estate market in response to exogenous shocks in the goods market. The analysis is initially performed assuming demand certainty. A conclusion of this analysis is that the apparently contradictory phenomena of rising vacancies and increased construction could be the outcome of rational decisions. During periods of oversupply, the space producer will not necessarily lower the rental rate to induce the goods producer to absorb excess vacancies (those above some normal or natural level).

When rental rates are lowered too much, the space producer may be unable to meet long-term payment obligations. On the other hand, if vacancies are too high, then the total holding costs of the property (including operating and debt service costs) can become too burdensome. It is not until it becomes apparent to space producers that the holding costs cannot be offset with property cash flows that new space production will cease.

References DiPasquale, D. and W. C. Wheaton. 1994. Housing Market Dynamics and the Future of Housing Prices. Journal of Urban Economics 35: 1-27. Shilling, J. D. , C. F. Sirmans and J. B. Corgel. 1987. Price Adjustment Process for Rental Office Space. Journal of Urban Economics 22: 90-100. Caballero, R. J. 1991. On the Sign of the Investment-Uncertainty Relationship. American Economic Review 81: 279-288. George H. , Lentz, K. S. Maurice Tse (1999). Adjustments to Demand Shocks in the Commercial Real Estate Market. Journal Real Estate Economics. Volume: 27. Issue: 2. accessed on http://www. questia. com on 28th November, 2008 http://www. tutor2u. net/economics http://scribd. com