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Assessment

Explain why

commercial property markets display volatility

and how the amplitude of this volatility related to macroeconomic indicators. You will need to consider how cycles are generated, how they relate to cycles in use, investment, & development markets and the wider economy.

DEPARTMENT OF URBAN STUDIES AND PLANNING
Assessment
Explain why commercial property markets display volatility and how the amplitude of this
volatility related to macroeconomic indicators. You will need to consider how cycles are
generated, how they relate to cycles in use, investment, & development markets and the wider
economy.
Style and Coverage:
The essay should be 2000 words (±10%) plus references). You will need to draw together
lecture and reference material on the economics of commercial real estate markets. In
addition to the references in the reading list, you can use other references in the citation index
(via Star Plus or Google scholar). You must cite all the sources you draw upon in the normal
academic manner (using the Harvard method). Your assessment should be submitted via
Turnitin/Blackboard.
TRP107 Economics for Spatial
Planning
Economics Concepts and Resource
Allocation
Introduction
• Economics is concerned with the way in which
society decides what, how and for whom to produce
goods and services from limited resources.
• The economic problem: resource allocation problem
for all common societies.
• The aim of this lecture is to examine the ‘economic
problem’ in more detail
• It will look at scarcity, choice and resource allocation
• It will introduce ideas from welfare economics
• It will look at the economic rationale for planning
Fundamental Question of
Economics
What to
produce?
For Whom to
Produce?
How to
produce?
We have limited resources, but unlimited wants!
Businesses producing goods and services.
Q: can you give an example for goods and an
example for services?
Factors of Production
Land
Labour
Capital
Entrepreneurship
What to produce?
• If we assume a simple two commodity
economy, it is not clear what quantity of
each to be produced
• There is a trade-off
• This can be captured in a Production
Possibilities Frontier/Curve (PPF/PPC)
Figure 1: A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
Figure 2: A production possibility curve for Builders
8
Units of housing units (millions)
7
6
Housing Units Office Units
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
6
Units of office units (millions)
7
8
Berna’s Dream on Being an Influencer
Should I bake more cakes or upload videos?
Cakes
15
Cakes
Videos
15
0
8
2
3
4
0
5
5
Videos
Why PPP is a curve but not a line?
Car
Pear
15
Apple
15
Apple
Figure 3: Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
Figure 4: Growth in potential output
Food
5 years’ time
Now
O
Clothing
Any production on the
PPC: Feasible
Productively efficient
e.g : point x, y, z
All economic resources
utilised
Any production outside PPC:
Insufficient economic resources Only
feasible with PPF expansion
Point u
Cakes
Any production
inside PPC:
Feasible
Productively
inefficient
e.g : point v, q
Unused economic
resources
q
Videos
PPF and Economic Concepts
• Examines the question of what to produce
– Feasible versus infeasible production possibilities
– Choice between possibilities
– Efficient production desirable
– Trade offs and opportunity costs even at efficient points
– Diminishing returns to inputs
– Expansion of resources (or technological change) required
for expansion of economy from PPC
• Difficult decisions about what to produce, even before
consideration of how or for whom
• Ideal is to attempt to maximise social welfare
– See Figure 5 Social Welfare Function
30
Units of good Y
Figure 5: Social Welfare Functions
20
10
I5
I4
I1
0
0
10
Units of good X
I2
20
I3
Figure 6: Finding Pareto Optimality: SWF and PPC
r
Units of good Y
s
Y1
t
u
I5
I4
v
I1
O
X1
Units of good X
I2
I3
Efficiency and inefficiency
• The concept of efficiency is central to welfare economics
– the study of the welfare of the members of society as a group
• An efficient allocation of resources is one from which it is not
possible to make a change that will make some
individuals/groups better off without making someone worse off
– This is know as Pareto optimality/Pareto efficiency
• It is assumed that, under certain conditions (known as perfect
competition), the workings of factor and product markets will
produce an allocation of resources consistent with Pareto
Optimality
– Adam Smith’s ‘Invisible Hand’; resources gravitate to most
efficient uses
– Land allocated to highest and best use
• Economic efficiency is a broad concept with several important
dimensions
Dimensions of Efficiency
Efficiency requires:
– Allocative efficiency: requires all (micro) markets to be efficient
– Operational/Adaptive efficiency: there no institutional impediments to market
adjustment
– Informational efficiency: this requires perfect knowledge of past, present
and future prices and quantities in all markets
•
Land and Property markets are widely held to be very inefficient (note:
classic essay question)
– Evans (1995: 28) points out that “the ‘inefficiency’ of the property market
means …that with good information…excess profits can be made. It is no
accident that so many millionaires made their money in the property market
– it is a result of its inefficiency”.
The ‘efficiency’ case for intervention
•
•
Markets do not operate as if the world was an economics textbook;
rather markets are social constructs
The absence of ‘efficient’ or ‘perfectly competitive’ land and property
markets leads to inequitable allocation of resources (eg inside X or Y in
Figure 3)
– Society will fail to produce at capacity (eg. lack of business space to
accommodate new firms and jobs, homelessness, etc)
– Some groups/locations will be disadvantaged (eg leading to urban
deprivation, regional inequities, etc)
•
•
This provides the rationale for government intervention: but the case for
intervention is not without controversy
‘The important thing for government is not to do things which
individuals are doing already, and to do them a little better or a little
worse; but to those things which at present are not done at all’ (JM
Keynes)
– Crowding out can occur: state uses resources that private sector could
have employed (MCQ?)
Market Failure: Externalities
•
•
•
•
•
The imperfect nature of markets means that they are unable to attach
costs/prices under certain circumstances
– This is one of the reasons they do not in reality produce optimal social
welfare
One important area of market failure is the treatment of ‘externalities’
Externalities exist whenever the behaviour of individuals/groups impose costs
(or bestow benefits) on others that are not reflected in market transactions
– Also known as external costs and external benefits; negative or positive
externalities
Most market actors make production decisions based on private costs and
benefits, rather than wider social impacts
– Thus Builders will be concerned about the cost of land, materials (etc) and
the price of housing; they are not concerned with the effects of building on
the loss of green space or local amenities
There is no market imperative to prevent producers from reducing social welfare
in many cases; often taxes are used to introduce ‘social’ costs
Market Failure: Public Goods
• Another challenge relates to public goods
• In theory, pure public goods exhibit non-excludability; non-rivalry
in consumption; and non-rejectability
• Public goods are those which ‘all enjoy in common in the sense
that each individuals consumption leads to no substraction from
any others consumption of that good’
• There is no incentive for private enterprise to supply these
goods, especially as it cannot be produced for A at the exclusion
of B
– Considerable debate about pure examples; but there are many
‘quasi’ public goods including street lighting, roads, etc
• The problem is how does society pay for their production and
maintenance; there are significant ‘free rider’ problems
The Market Failure Case for Planning
•
•
•
The pervasiveness of market failure provides another economic
justification for planning
There are a variety of options for dealing with negative externalities
Policy makers can introduce financial penalties in the form of taxes; this
effectively introduces a comparable ‘social’ cost into the market
– There has been debate about taxing the use of greenfield land
•
They can also regulate/restrict behaviour
– Examples include green belt policies and the development control system
•
They can use similar mechanisms to secure a contribution is made to
the production of public goods
– Consider planning obligations (Section 106 agreements) & the Planning
Gain Supplement to secure affordable housing and other infrastructure
contributions
•
We will look at the ways in which interventions of this sort impact on
market behaviour, efficiency and equity in lecture 4
Conclusions: the economic rationale for
planning
•
Welfare economics shows that markets are unable to allocate
resources in a Pareto efficient/optimal manner
– Land and property markets, in particular, are characterised by imperfections
which lead to (allocative, adaptive and informational) inefficiency and
market failure
•
•
The state is required to to internalise ‘externalities’ and to deal with
the provision of ‘public goods’ and ‘free rider’ problems
Thus, welfare economics provide a strong theoretical justification for
planning intervention; there is a clear case for intervening in markets to
ensure that the actions of actors produce the greatest benefits for
society as a whole (which includes promoting economic growth); this is
consistent with government statements on the aims of ‘planning’
– But, of course, “imperfectly informed planning will make the economic cost
of planning greater than necessary” (Maclennan, 1992 for the HBF)
•
Key question: Do the (private and social) benefits of planning exceed
the (more obvious) costs?
Reading
Background Reading: please see them in the Reading
list tab on Blackboard
• Taylor et al. (2017) Principles of Economy
• Sloman , J (2006) Economics
• Evans, A (2004) Economics, real estate, and the
supply of land
TRP107 Economics for Spatial Planning
Topic 6
Real Estate Market & Cycles
Lecture Structure
•
•
•
•
•
Introducing the Real Estate
Real Estate Market/Submarkets
Real Estate Market Motivations
Commercial Real Estate Market & Cycles
Housing Market &Cycles
Introducing the Real Estate
• Real Estate: Property in the form of land or building (Cambridge
Dic.)
• Land and buildings; often referred to as ‘real’ property or real
estate (Physical-real)
• Real Estate Price/Value –
– Market Value – Capital Value: The price/value of the asset. Sale price – buyers
and sellers determine . e.g The price of a 3 bedroom detached house with a
garden in Sheffield Ranmoor – £450K
– Rental Value: Income . The price given for a specific service. E.g a monthly
payment given for using the property. eg. Rental payment for a 3 bedroom
detached house with a garden in Sheffield Ranmoor- £1200
• Real estate is product that is exchanged in the market by buyers
and sellers
Real Estate Market
• Market: Buyers-sellers determining the price
• Real Estate Market: a set of rules, regulations, norms,
network
• Real Estate Market Actors: users, investors, developers,
finance sector actors, planners, real estate agencies,
solicitors,
The relationship between the market actors shapes the real
estate market, urban/rural development , prices.
Land use in the UK: market [buyers & sellers]+ regulations
(planning system
Real Estate Market
•
•
•
•
The real estate market is the ‘institution’ within which property rights are
exchanged/ traded
The market comprises a complex set of actors and organisations, and
formal/informal rules, conventions and structures that shape the nature of
exchange;
To most individuals purchasing property is the highest value transaction of
their lives – and the major source/store of wealth; on the commercial level,
major institutional investors hold more than £500 billion of property (out of a
total of £800bn)
Property provides the location for economic activities – it houses the service
and manufacturing sectors of the economy
Real Estate Market/ Submarket
• Land and property represent a major element of the ‘urban asset
base’ upon which city competitiveness and local economic
development is based
• Location/ Geographical Area
• The segments in the housing market are formed by aggregating
neighbourhoods with similar characteristics. Price, socio-economic
characteristics, amenities and disamenities, facilities
• So real estate market is a combination of factors of property +
institution + geography.
• Eg. An identical property in different locations?
Sectoral Submarket
Main Sectors in Real Estate:
â–ª Residential (Housing)
â–ª Retail
Commercial
â–ª Office
â–ª Industrial
â–ª Logistics
â–ª Agriculture
• But there are many sectors, student
accommodation, leisure, marine, even vineyards
Economic Characteristics of Real Estate
• The operation of the real estate market is complicated by the unique
characteristics of property as an economic good
• Property is:
– heterogeneous;
– spatially immobile (locational fixity);
– durable
• Property is also:
– Indivisible and illiquid
– A dual commodity: land and buildings
– A consumption and investment good
– Difficult to produce (supply is price inelastic)
– Multiple uses
Real Estate Market
Motivation? Rationale Behind?
• Need: Meeting the need for sheltering, running a business
• Gaining Capital Growth: property price going up (appreciation) or
down (depreciation)
• Capital is the amount of money which you use to invest in
order to make more money.
• Security of Capital: can the investor be able to get back the capital
when they decide to sell?
• Generating Income (Rent): could it be an income for the
individual/institutional investors
So mainly the motivation revolves around the return (but there is also
risk)
Real Estate Market and Macroeconomy
• There are important linkages between the macroeconomy and real
estate markets (and these have implication for public policy)
• These linkages flow in two directions:
– The macroeconomy has a profound impact on the performance of
property markets
– Real estate markets can constrain or facilitate economic growth
• Planners need to understand these linkages. This has implications
for monitoring and managing the housing market and policies
designed to stimulate local and regional economic development
– The relationship between real estate (both commercial and
housing/residential) and the wider economy
– The problems specific to the housing market
Commercial Real Estate Markets:
Background
• While housing is mainly owner occupied, commercial
real estate has separate users (occupiers) and owners
– Ownership is dominated by major institutional investors who
treat property as a financial asset
• The market tends to be conceptualised in terms of a
linked user (occupier or space) market and an investor
(asset) market
– Business rents (rental values) are determined in the user market
– Capital values are determined in the investor market
– Investors seek income (in the form of regular rental payments)
and capital growth (in terms of ‘capital’ value)
User and Investor Markets
User Market (aka Space/Occupier Market)
• The real estate market comprises a total stock; stock is occupied by
commercial users
• These users/occupiers consume the ‘services’ provided by property; serves
a range of social and economic functions; homes, manufacturing bases,
administrative/service provision, exchange of goods
Investor Market (aka Capital/Asset market)
• Properties are also financial assets (subject to investment as well as
consumption demand)
• Ownership and occupation are usually separated (except in housing usually); and ownership is dominated by investors and, in particular, major
financial institutions
• These investors require assets that appreciate in capital value and also
provide an income stream (in the form of rents)
Development Market
• Investors own but do not directly supply property; developers (and
construction companies) create new space (new units)
• Success depends on demand from both occupiers and investors;
• The three sectors are inter-related; But to understand their dynamics
we need an appreciation of some basic concepts
Use, Investment and Development
• UID Model (Source: Keogh, 1994)
Real Estate Market Cycles
• Suppliers of goods and services are demanders in the built
environment.
• Demand for real estate is derived from demand in the wider
economy
• Economic growth produces changes in demand for commercial
(industrial, retail and office) space. Empirical evidence shows:
– Office demand relates to office employment
– Industrial demand relates to manufacturing output
– Retail demand relates to consumer expenditure and retail sales
• It also produces a demand for infrastructure.
• And produces a demand for residential real estate.
• Like the the wider economy property markets are highly
cyclical/volatile
Volatility Factors
1. Business cycle (macro economic
conditions, economic growth, demand
and supply interaction)
2. Behavior of Investors (speculative
investment)
3. Behavior of Developers (speculative
development)
Commercial Real Estate Market Cycles
•
•
•
•
•
•
•
•
•
Cycles occurred in the early 1970s, early 1980s and late 1980s; 2000s, 2020’s similar
processes were repeated in each period
The cycle was generally initiated by macroeconomic change; Strong
economic/business cycle upturn leads to ↑ employment
This leads to ↑ demand for business property which coincides with relative inflexibility
of supply
Demand for space ↑, business rents ↑, (investor’s) capital values ↑.
In the macroeconomy prices rise and interest rates are used to encourage saving
rather than spending
Profitability of development rises, so new buildings are started (with expensive, high
interest loans) but only arrive on the market with a lag (see The Cobweb Model for an
illustration of the adjustment process)
Often this coincides with economic downturn and a fall in demand (and developers go
bankrupt); the next phase is at least softened by the overhang of supply
It is often argued that the planning system exacerbates these problems because they
stop market adjustment and contribute to the mismatch between S and D
It is also clear that property cycles are more extreme than business cycles because
of the speculative nature of property investment
Rate of Change in Real GDP and Property Rents
25
20
15
10
5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20
-5
-10
-15
-20
-25
-30
D-Retail
D-Office
D-Indust
DGDPR
Cobweb Theory
Figure 1. Cobweb Theory
Housing Market Dynamics
• UK house prices are highly volatile; Booms and busts reflect
mismatches between the flow supply and flow demand of housing
• The most pronounced boom-bust phase occurred between mid1980s and early 1990s (with a peak in 1989)
– This brought record levels of mortgage arrears and
repossessions; and was accompanied by wide reaching social
and economic problems
• It is clear that to understand price instability we need to explore the
factors that influence underlying demand and supply conditions over
time
• If the flow of demand outstrips supply prices will rise; if supply
outstrips demand prices will fall (think about this using comparative
statics)
£1 house sale in Liverpool
Virtually identical house in the
same city worth £80k. Why?
• Variation in value is almost entirely due to
location factors:
– Aesthetics of the urban environment
– School performance
– Access to amenities
– Social mix
– Crime
– Income elasticity of demand for high amenity
locations may be much higher than for low
amenity locations…
Housing Cycles
• Ownership composition ->70%
• Different than commercial real estate market , in
terms of actors
• Kate Barker Review: if people spend most of
their income on housing , then they have less to
spend on other good and services which has an
enormous impact on the wider economy.
• Housing market has wider implications. If there
is enough supply , then there would be more
stable market?
Housing Cycles
• House prices are also very unstable
• Barker’s Review of Housing Supply was (in part) initiated by the
Treasury and concerns about the macroeconomic consequences of
house price instability
• The stated goal of Barker’s Review of Housing Supply was to think
about how to achieve:
– a more flexible housing market that will adapt to and reflect the
needs of the economy (think about the relationship between
housing and labour)
– a more equitable distribution of housing wealth (think about the
effects on income polarisation and of equity withdrawal on
consumption)
• This placed an understanding of the influence of planning on the
supply and price of housing on centre stage
• Most of the evidence base consulted by Barker and the subsequent
analysis commissioned by govt was macro (conducted at national
and regional level)
“Fixing our Broken Housing
Market*”
• Recent researches have argued that the housing crisis is a much
deeper issue than simply a gap between supply and demand.
• Dorling (2014): the crisis is more related with the unequal
distribution of new housing, if the allocation of new homes were to
be more evenly dispersed, there would be an adequate supply to
shelter the English population.
• Cheshire (2014) “We have not been building enough houses for
more than 30 years, and those we have been building have too
often been in the wrong place or of the wrong type to meet demand.
For example, twice as many houses were built in Doncaster and
Barnsley in the five years to 2013 than in Oxford and Cambridge”
(2014: 15).
• Gallent’s (2015) paper focuses on the unequal access to new
homes , this is a result of the increase in domestic and overseas
investment. This surge is predominantly concentrated within
London’s real estate market, ‘ripple’ effect
*https://www.gov.uk/government/publications/fixing-our-broken-housing-market
Annual Rates of Change in House Prices and GDP
30
25
20
15
Chg in HP
5
Chg GDP
-10
-15
-20
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
-5
19
72
0
19
70
%
10
Housing Cycles
There are overlaps between the wider economy boom
and boost and housing prices (but more sharply).
So why house prices are so volatile? What causes this?
Do we really understand the what is going on the
market?
Our perception/expectation on housing as an
investment?
The output of new homes being constructed per annum within England
between 1946 and 2018. Please note that the government believes around
250,000 new houses should be constructed every year in order to mitigate
the crisis (DCLG, 2020).
The Flow Demand for Housing
• Temporal fluctuations in the demand for housing are influenced by:
– Income growth: individual household income linked to
employment
– Current house price and expected price inflation: Smith (2006)
identifies ‘desperation’ motives
– Loan to income and loan to price ratios; both have risen rapidly
since financial deregulation (the ‘Big Bang’) in 1987
– Mortgage interest: determines size of repayments
– Rate of household formation: average size of households has
declined steadily
The Flow Supply of Housing
• Temporal fluctuations in the supply of housing are caused by:
– Price levels in the recent past (1-2 year lag): informs bulders’
expectation of profits
– Interest rates: most development requires debt finance
– Land available for housing with planning permission (and the
planning regime): see lecture 4 for empirical evidence on this;
there are spatial and temporal variations in regimes
– Construction costs: including wages, land values, materials, etc
Transnational Wealth Elite*-Cities being Safe Deposit
Boxes
*estimated 200.000 in the world- $140 million per person
wealth
• Wealth elite geographically diversify their investment portfolio in:
– first tier global cities (Eg: London, New York, Singapoure)
– capitals of luxury tourist destinations (Davos, Carribbean )
– second tier global cities (Paris, Amsterdam, Miami)
• Main drivers of investment decision making process
– agency of transnational wealth elites and their advisers (lawyers, asset
managers and real estate agencies)
– Role of their offshore financial centers –that produces legal vehicles to
circumvent legal structures for the investors – a virtual country of super
rich (Hay, 2013), tax avoidance
– Buy to live-buy to let-buy to leave
•
•
•
•
As an investment to sell in the future (55%)
Safe haven for their funds (47%)
To diversify their portfolio (46 %)
A new place to live (37%)
Fernandez et al (2016) London and New York as a safe deposit box for the transnational wealth elite, Environment and Planning
A, Vol 48 (12)
Conclusions
• Real Estate markets are highly volatile
• The inefficiency of the market means that there is a clear case for
intervention
• The volatility of the market is a side effect of its imperfections and
inefficiencies
• This volatility has important implications for the performance of local,
regional, national and international economies
• Increasingly (the aggregate effects of) local planning decisions are
seen as playing an important role in economic competitiveness
Reading
For more on Real Estate Markets check:
• Harvey, Jack, (1996) “Characteristics of the real property
market – Chapter 2”
• Barker Review of Housing Supply (2004)
https://web.archive.org/web/20080917085114/http://www
.hmtreasury.gov.uk/consultations_and_legislation/barker/con
sult_barker_index.cfm
• Ball, M, Lizieri, C and MacGregor, B (1998) The
Economic of Commercial Property Markets, Palgrave
• Balchin, P et al (various) Urban Land Economics,
Palgrave
Capturing land values: why should we and how
do we do it?
USP Module Seminar 3rd May 2022
Professor Tony Crook CBE BA MPhil PhD LittD FAcSS FRTPI FRSA
Former Pro Vice Chancellor, The University of Sheffield
Outline of presentation
• Relevant planning legislation
• What determines land values? What are development values?
• What’s been happening to land values?
• Why should we ‘tax’ them
• How have we done it?
• How much have we raised?
• Successes and challenges
• What next?
• The proposed Infrastructure Levy
• Q&A
• Some reading
Relevant planning legislation: brief!
• 1947 Act nationalised development rights
• all development (new building and change of use) needs planning permission
• Many changes to legislation since 1947 but this fundamental unchanged
• Policy framework for planning decisions includes national policy and local adopted plans
• Decisions must respect policy but also take account of other material considerations
• Much discretion built into system reflecting our common law approach, unlike rules
based approaches in other jurisdictions subject to civil law
• This discretion allows local authorities to negotiate with developers
• Ministers have appellate as well as policy role
• Planning is a devolved matter in Northern Ireland, Scotland and Wales
What determines land values?
• Land value is a residual:
• land value=income-costs
• Income includes all the sales from operating on the site e.g. houses sold;
turnips grown and sold over years; cars made and sold over years etc.
• Technically using discount rates to work out current values of futures sales
•
Costs include all costs of securing that income e.g. for housing: site works;
costs of building new homes; fees; loan charges; profits.
• The difference is the maximum it is worth bidding for the land;
• Subject to planning policy the site generally sold to the highest bidder
• Development value is the difference between value in existing use and a
new use: it is this value we have sought to tax or capture in other ways
Development Values
What has been happening to land values?
Land Values in England in 2015
(£m per hectare with planning permission)
Location
Agricultural
London
Rest of England
England inc London
0.021
Industrial
Residential
2.73
29.10
0.51
2.10
0.76
6.90
What has been happening to land values?
Residential land values index: 1991 to 2015
Land values and national balance sheet
(£m)
• UK net worth trebled
between 1995 and 2017
• Land values are 51 percent
of national wealth
• More than other G7
countries
What has been happening to land values: why
have they gone up so much?
• Demand side pressures
• More households
• Growth in incomes: households spend more on housing
• Demand for low density neighbourhoods near good schools
• Supply side constraints
• Brownfield first/regeneration policies
• Other planning restrictions (e.g. Green Belts) in high demand areas
• Impact of monetary policy since the Global Financial Crisis
• Raised asset prices, especially property, in search for yield
Why should we tax development values?
• Equity/fairness arguments:
• development value is an ‘unearned increment’
• high values make it difficult to build homes that low income
households can afford
• Efficiency arguments:
• developers should be taxed to pay for the infrastructure their new
development requires
• Public finance
• We need more tax income to pay for public services
• Some think taxing development values has no impact on land
supply: wrong!
How have we ‘taxed’ development value?
• National taxation of development values
• Three schemes in 1947, 1966 and 1974
• In 1966 and 1974 schemes local authorities could buy land net of the
tax
• Using planning obligations and Community Infrastructure
Levy (CIL)
• Planning authorities negotiate with developers to make contributions
to new infrastructure and new affordable housing
• Developers costs go up so they pay less for land and in effect
landowners pay
• Local authorities and New Towns etc. once had an ability to
buy land compulsorily at its value in existing use
How much have we raised: per site?
Outcomes: value captured
by national taxation and planning
obligations/CIL: 1952 to 2018-19 at
nominal and 2018-19 prices
8000
7000
6000
5000
4000
3000
2000
1000
0
£ per new home
60000
50000
40000
£ per new
home
30000
20000
2018-19
2011-12
2005-06
1983-84
0
1952
1952
1969-70
1983-84
2003-04
2005-06
2007-08
2011-12
2016-17
2018-2019
10000
NB very little development land acquired by public bodies at existing use value
during national taxation measures (except in early New Towns)
Successes and challenges
• National taxes failed: land kept off market/little tax raised/taxes took no
account of site by site viability and incentives/not hypothecated
• Planning obligations worked better:
• Local government initiative, not top down national tax
• Site by site negotiations within local policy framework address viability
• Developers contributions used for local needs, i.e. infrastructure (e.g. schools) and
affordable housing (mixed in with market housing on new developments)
• Developers ‘happy’ to pay (as they shift costs onto landowners) as get local
infrastructure they need/local authorities short of funds (austerity etc.)
• But there are challenges to planning obligations and CIL
• Works well in market upturn and in ‘south’; less well in downturn and ‘north’
• Negotiations can be tortuous and lengthy
• Big variations in what local authorities secure, even in similar market contexts.
• CIL doesn’t work for large and complex sites
20
Max = 70
Agreements per 1,000 population
18
16
14
12
10
8
6
4
2
0
Established
Urban
Centres
London
Prosperous
Britain
Rural
England
Rural
Towns
Urban
England
What next?
•
Methods to secure capture of development value via planning obligations now very
embedded in planning policy and practice
• But government now proposes to change the system and introduce an infrastructure
levy which will work like a sales tax
• i.e. developers will pay to local authorities (say) 20 percent of their sales income
from development so they will have to pay less for land to maintain profits
• How might this work?
•
On large scale developments including urban extensions and mini new towns
• Likely to be partnerships between public sector, developers and land owners to bring
land into joint ownership with sharing of profits from development values crated by
new investment etc.
•
A big and unresolved questions is how to address regional imbalances in development value
raised
•
In general we only capture increased values when new development takes place and we
need to find better ways of taxing those existing owners who benefit from new
infrastructure
Pros and Cons of S106/CIL and IL
• S106/CIL
• Infrastructure Levy
•
Well understood, raises significant funds and
contractually links agreements to provision
•
Simple sales tax, reduces developers’ costs
especially SMEs, helps developer cash flow
•
But complex and uncertain negotiations add to
developers costs and risks are mainly developer
not LPA side
•
Very few exemptions….PD included in levy
•
But there will be complexity in fixing rates,
thresholds, GDV estimations and valuations
•
Especially for SMEs
•
•
Amount raised depends as much on variations in
LPA policy/practice as market conditions
Risks transferred to LPAs (borrowing costs,
market adjustments etc)
•
On site affordable housing ‘protected’
•
Lots of exemptions for S106 etc incl PDR
•
•
CIL has delinked payments and provision of
infrastructure
But no guarantee that funds ring fenced for
infrastructure
Agreed for
S106 and CIL
in 2018-19
Total for
England
Percent in
London, SE
and East
£7.0bn#
64%
Our results
20 percent IL and 30 percent IL and 20
20 percent
percent affordable
affordable
housing
housing
IL: 40 pc London; 30 pc SE, E & SW;
20 pc Midlands; 10 pc N;
Affordable housing: 40pc London;
30pc SE E & SW; 20 pc Midlands;
10 pc North
£5.6bn*
£7.9bn*
£8.4bn*
66%
71%
74%
Percent for
northern
regions
13%
6% but neg land
values in Yorks &
Humber and NE
none
3% (none in NE)
Total afford
hsng
£4.7bn
£3.7bn
£4.7bn
£6.8bn
Total for
other spend
inc
infrastructur
e
£2.3bn
£1.9bn
£3.2bn
£1.62bn
# NB this yield came from less than 100% of all completions because of exemptions (small sites, PD etc and
little commercial)
* NB wider planning reforms might generate more development and hence yield more IL
Options for gov’t to simplify the system and raise
funds to deliver affordable housing and infrastructure
Infrastructure Levy
• Regional or intra regional rates
• In kind provision of infrastructure
netted off from IL ‘dues’
• Redistribute some of IL to help
fund investment in lower value
areas
•
•
•
•
•
S106/CIL
Ensure all requirements in Local
Plans
Fixed tariff for small sites for
affordable housing and site
mitigation with no exemptions
Retain S106 for larger sites
Partnerships (Letwin style) for
very large sites
CIL only for Mayoral (London and
Combined Authorities)
In conclusion
Thanks for listening, I hope it was interesting!
Any questions?
Some background reading on the next slide
Some background reading
•
BLANC, F., BOYLE, J., CROOK, A.D.H., SCANLON, K., SMITH, S. & WHITEHEAD, C.M.E. (2022), Developer
contributions for affordable homes and infrastructure — Anglo-Scottish comparisons and lessons. Part one: Scotland, Town
& Country Planning, 91(1), pp 14-19
•
CROOK, A. D. H., and WHITEHEAD, C. M. E. (2019), Capturing development value, principles and practice: why
is it so difficult? Town Planning Review, 90(4), pp 359-381
•
CROOK, A. D. H., HENNEBERRY, J. M. and WHITEHEAD, C. M. E. (2016), Planning Gain: Providing
Infrastructure and Affordable Housing, Chichester, Wiley-Blackwell.
•
CROOK, A. D. H., HENNEBERRY, J. M. and WHITEHEAD, C. M. E. (2020), Proposed Infrastructure Levy:
projections of income, Additional evidence submitted to House of Commons Housing Communities & Local
Government
Select
Committee
inquiry
into
the
Planning
Reform
White
Paper,
https://committees.parliament.uk/writtenevidence/18315/pdf/
•
CROOK, A. D. H., HENNEBERRY, J. M. and WHITEHEAD, C. M. E. (2021), Funding affordable homes and new
infrastructure: improving S106 or moving to an Infrastructure Levy?, Town & Country Planning, March
•
LETWIN, O (2018) Independent Review of Build Out, Cm 9720, London: MHCLG
•
LORD, A., DUNNING, R., BUCK, M., CANTILLON, S., BURGESS, G., CROOK, A., WATKINS, C. and
WHITEHEAD, C. M. E. (2020), The Incidence, Value and Delivery of Planning Obligations in England in 2018-19,
London, Department for Communities and Local Government.
•
MINISTRY OF HOUSING COMMUNITIES & LOCAL GOVERNMENT (MHCLG) (2020) Planning for the Future
White Paper, London: MHCLG
TRP107 Economics for Spatial
Planning
Topic 3: Introducing Macroeconomy
Lecture outline
• Introducing Macro-economy
• Economic Cycles-Fluctations
• Macro- economic indicators
• Circular Flow of Income
• Monetary and Fiscal Policies
Introducing Macroeconomics
•
•
So far we have focused on microeconomic issues, the next few lectures explore
macroeconomic issues
Major macroeconomic issues include:
– economic growth
• Policy objective – stable economic growth
• Increases in real income, output → improvements in welfare, standard of
living
– unemployment
• Policy objective to reduce unemployment
– inflation rate
• Policy objective keep it low and stable
– Interest rates
• Policy objective keep it low and stable
– Exchange rates
Introducing Macroeconomics
• Macroeconomics is concerned with the whole economy; it is
aggregated level of single markets/sectors
• Most macro analyses focus on variables that are averages (rents,
capital values, vacancy rates, etc) or aggregates (output, GDP, etc)
of individual actor and local market activity
• The assumption is that such aggregate analysis provides a
reasonable explanation of the workings of most of the component
markets
• Most macro analyses of the real estate market focus on fluctuations
in property values and development output; and the way in which
markets adapt to (and influence) economic change
• The most significant macro issue in real estate – property cycles
Economic growth (average % per annum),
Unemployment (average %), Inflation (average % per annum)
The business cycle
Potential output
National
output
Trend
output
Actual
output
O
Time
GDP/ Gross domestic product
• “Gross domestic product or GDP is a measure of the size and health
of a country’s economy over a period of time (usually one quarter or
one year). It is also used to compare the size of different economies
at a different point in time”
• To measure GDP each quarter, the Office for National
Statistics (ONS) collects data from thousands of UK companies. And
to complicate matters, there are three ways to measure GDP! You
can calculate it by adding up, for everyone in the country:
– The total value of goods and services (‘output’) produced;
– Everyone’s income;
– Or what everyone in the country has spent.”
https://www.bankofengland.co.uk/knowledgebank/what-is-gdp
sa
https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/whatisgdp/2016-11-21
Inflation Rate
• “Inflation is a measure of how much the prices of goods (such as
food or computers) and services (such as haircuts or train tickets)
have gone up over time.
• Usually people measure inflation by comparing the cost of things
today with how much they cost a year ago. The average increase in
prices is known as the inflation rate.
• So if inflation is 3%, it means prices are 3% higher (on average)
than they were a year ago. For example, if a loaf of bread cost £1 a
year ago and now it’s £1.03 then its price has risen by 3%.
• To keep inflation low and stable, the UK Government sets us an
inflation target of 2%.”
Exercise:
Use inflation calculator to find out how prices have changed since you
were born. https://www.bankofengland.co.uk/monetarypolicy/inflation/inflation-calculator
https://www.bankofengland.co.uk/monetary-policy/inflation
Interest Rate
“Interest is what you pay for borrowing
money, and what banks pay you for saving
money with them.
Interest rates are shown as a percentage of
the amount you borrow or save over a year.
So if you put £100 into a savings account
with a 1% interest rate, you’d have £101 a
year later.”
https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
Interest Rate
• If interest rates increases, borrowing could become more expensive
for you.
• Imagine you have a £100,000 mortgage that you want to pay off
over 15 years. If the interest rate on the mortgage is 2.5%, the
monthly repayment will be £667
• But if the interest rate is 1% higher, the monthly repayment will be
higher, at £715.
• Of course, interest rates can fall as well as rise. If the mortgage
interest rate was 1% lower, the monthly repayment would be around
£621.
• It’s key to understand how a change in interest rates could impact
investors’ capital.
Why economic growth matters?
• Why economic growth matters?

• Check Unemployment Rate
https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwo
rk/unemployment/timeseries/mgsx/lms
Question: Why economic growth is
important in the real estate market
especially in commercial real estate
markets?
Understanding the macroeconomy:
macro variables
•
Key macroeconomic variables include:
–
–
–
–
–
–
•
National Income
Gross Domestic Product/GNP
Employment/Unemployment Rate
Inflation Rate
Interest Rates
Exchange Rates
Other variables are highly relevant to different property sectors including:
–
–
–
–
–
Manufacturing employment
Manufacturing output
Office employment
Consumer expenditure
Retail sales
https://www.ons.gov.uk/
ME indicators in November 2020
https://www.ons.gov.uk/
ME indicators in November 2021
https://www.ons.gov.uk/
ME indicators in March 2022
Question:
What is the UK’s inflation rate getting
higher? – why is the cost of living going
up?• How will inflation affect housing prices?
•
Please discuss in pair and write your view
on a paper.
https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ihyp/pn2
“Household
spending forms
the biggest part,
accounting for
about two thirds of
GDP. Meanwhile,
a business buying
new equipment or
a construction
company building
houses are
examples of
investment.”
https://www.bankofengland.co.uk/knowledgebank/what-is-gdp
The circular flow of income
Firms
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Households
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
expenditure (G)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
BANKS, etc
Net
saving (S)
GOV.
Net
taxes (T)
ABROAD
Import
expenditure (M)
WITHDRAWALS
fig
The Circular Flow of Income
• Income and Output
• Withdrawals, W = S + T + M
– net saving (S)
– net taxes (T)
– import expenditure (M)
• Injections, J = I + G + X
– investment (I)
– government expenditure (G)
– export expenditure (X)
• If injection is bigger than withdrawal => economic
growth
The business cycle
Potential output
National
output
Trend
output
Actua
l
output
O
Tim
e
Short-term Growth & The Business Cycle
• The business cycle in practice
– fluctuations in actual growth
– the length of the phases
– the magnitude of the phases
• Causes of fluctuations in growth
– changes in aggregate demand
– changes in aggregate demand relative to potential
output
Aggregate demand and aggregate supply
Price level
AS
Pe
P2
b
a
AD
O
fig
Quantity : National output
Monetary and Fiscal Policies
•
Fiscal policy relates to the government’s use of government expenditure
and taxation policies.
•
Fiscal policy may be used to expand the economy if it is in recession
(expansionary policy).
– Ideas associated with John Maynard Keynes (and the old Left)
•
Alternatively it can be used to contract the economy if it is overheating
(high inflation) via contractionary fiscal policy.
•
Monetary policy relates to the control of interest rates or money supply in
order to control inflation.
– Ideas associated with Milton Friedman and the New Right
•
Monetary policy is operated by the central bank, currently, via inflation
targeting.
Supply Side Policies
Monetary and fiscal policies are demand
side policies – they affect the position of
the AD curve
• Supply side policies affect the position of
the AS curve
• Supply side policies often associated with
free market approaches to economics,
reduction of government intervention
•
Examples of Supply Side Policies
•
•
•
•
•
•
•
•
Reduce government spending to release more
resources for the private sector
Increase incentives by cutting tax
Reduce power of trade unions
Reduce entitlement to and value of state
benefits
Deregulation and privatisation
Training
Research and development spending
Assistance to small firms
Conclusions
•
•
•
Macro policy seeks to secure stable growth and to avoid distortions
associated with inflation and unemployment
Demand side (macro management) policies are used together with
supply side (sector-specific) measures
This provides the context for current debates about the role of
planning
– Does the planning system destabilise key sectors of the economy?
– Does it inhibit economic competitiveness (by restricting business
space and raising business costs)?
– Does it lead to distortions in investment and consumption patterns by
destabilising house prices?
– Does this exacerbate the mismatch between jobs and workers?
•
The macro significance of planning outcomes places it at the centre
of current supply-side policy debates
Reading
Sloman: chapters 12, 13, 15, 17, & 20
• Taylor: chapters 19,20,21,22
•
TRP107 Economics for Spatial
Planning
Topic 2: Demand, Supply and
Equilibrium
Introduction
• The last lecture introduced the idea that, under
certain assumptions, the market mechanism can
allocate resources efficiently
• Prices are important in rationing/distributing goods
and services
• This lecture will look at the way in which prices are
determined
• It will introduce demand, supply and market
equilibrium
• It will explore, using comparative statics, the workings
of the market/price mechanism
How do markets work?
• The market is where buyers and sellers come
together to determine the price of a good and the
quantity that will be exchanged
• Markets are characterised by a single price
– Economists refer to the ‘law of one price’
– Price influences the amount demanded and the
amount supplied
• The relationships can be understood with reference
to the laws of demand and supply
How do markets work?
Free market economy: prices
transmitting
information from buyers to seller
Buyers
(DEMAND)
MARKET
Sellers
(SUPPLY)
Markets are characterized by: agreed price
Task: Go to rightmove.co.uk and search for houses on sale in a neighborhood in Sheffield, such as Crookes,
Kelham Island, Fulwood. Check their prices
The Law of Demand
• LoD: the lower the price of a commodity, the larger the quantity
that will be demanded, other things being equal (ceteris paribus)
• The amount of a commodity that a household wishes to
purchase is the quantity demanded
– This relationship is often shown diagramatically
– The demand is desired rather than actual (which is
dependent on additional factors) and time specific (hence
the use of comparative statics to explore change)
• The amount of a quantity demanded by society as a whole is
known as market demand and is the summation of individual/
household demand curves
• See Figure 1
Figure 1: The Demand Schedule
100
Price (pence per unit)
Market demand
Point
Price
(pence per unit)
(‘000s)
E
D
80
C
60
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity of x (‘000s)
600
700
800
Changes in Demand
•
•
•
•
•
The quantity demanded will change with changes in price
It is also possible that the curve may change position (shift)
This will reflect changes in factors that determine demand (other than
price)
These include: tastes/preferences; number and price of substitute
goods; number and price of complementary goods (eg petrol and cars);
income; expectations; demographics
– Consider the factors that might induce a changes in demand for
owner occupied housing
– What impact would you expect from (i) a fall in house prices; (ii)
an increase in household income; (iii) a fall in rental values (renting
is a substitute) or (iv) a rise in mortgage costs (finance is a
complement)
All of these factors will lead to increase(or decrease) in quantity
demanded at all price levels
– See Figure 2
Figure 2: Changes in demand
Price
P
D0
O
Q0
Q1
Quantity
D1
Changes in Demand
Movement Along the Curve
Change
in Price
Change in quantity
demanded
Shift of the Curve
Nonprice
Factors
Change in demand
The Law of Supply
•
•
•
•
•
The quantity of any commodity (good. service) that firms will produce
and offer for sale will be positively related to price
As before think about : quantity supplied; market supply; desired rather
than actual; and time specific
Figure 3: depicts the supply curve
Price changes will induce shifts along the curve
Changes in other (non-price) determinants will shift the curve; in other
words the quantity supplied will be greater/less at all possible price
levels
– These factors include costs of production (inc technological
effects), profitability of substitutes, profitability of goods in joint
supply, expectations, etc
– Consider what would happen to supply of office property if (i) office
rents fall, (ii) retail property values rise (substitutes), (iii) prices are
expected to increase in two years time
Figure 3: Supply and Shifts in Supply curve
P
S2
Decrease
O
S0
S1
Increase
Q
Figure 4: Interaction between supply and demand
E
e
100
Price (pence per unit)
Supply
d
D
80
60
b
40
B
a
A
20
Demand
0
0
100
200
300 Qe 400
500
Quantity (‘000s)
600
700
800
Supply, Demand and Market Price
• Prices are determined by the interaction between supply and
demand
• What if Price is above D=S?
• What if price is below D=S?
• Markets will automatically adjust to equilibrium (balance
between S & D); it will persist if there are no net pressures for P
or Q to change
• New Equilibrium positions will be established if there are shocks
to the system
– Consider the effects on the Housing Market if (a) household income
decreases; or (b) construction sector wages fall
• See Figures 5a & 5b: Market adjustment
Figure 5a: Market Adjustment under Excess Demand
E
e
100
Price (pence per unit)
Supply
d
D
80
Cc
60
b
40
SHORTAGE
B
(300 000)
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (‘000s)
600
700
800
Figure 5b: Market Adjustment & Demand
P
Shifts
S
i
Pe2
g
h
Pe1
D2
D1
O
Q e1
Q e2
Q
Elasticity
• The relationship between price and output is not always the
same
– For example, in the UK a 1% rise in the price of housing
leads to a less than 0.4% increase in quantity supplied; while
in the US a similar rise will lead to a 2% increase in quantity
supplied
• This depends on elasticity: which measures the responsiveness
of supply and demand to changes in factors that effects them
(eg price, incomes, etc)
• Price elasticity of demand is the responsiveness of demand to a
change in price (I.e. the percentage change in Qd divided by the
percentage change in price) PED = % change in Qd  %
change in price
• Elasticity depends on number and availability of substitutes,
time period (short run v long run)
Figure 6: Elastic demand
Expenditure falls
as price rises
P(£)
5
b
a
4
0
D
10
20
Q (millions of units per period of time)
Figure 7: Inelastic demand
Expenditure rises
as price rises
8
c
P(£)
a
4
D
0
15
20
Q (millions of units per period of time)
Price Elasticity of Supply
• Price elasticity of supply is the responsiveness of supply to a
change in price (i.e. the percentage change in Qs divided by the
percentage change in price)
• PES is determined by existence of stocks (eg vacant property),
mobility of factors, capacity of industry
– It varies between time periods
• PES of housing in UK is very low (in both short and long run)
• This is caused by planning regulations, high construction costs
(eg land prices), shortages of skilled workers, housebuilders’
strategies (eg ladn banking)
• Estimates suggest PES for UK housing is 0.4 compared with
offices (0.8), retail (1.6) and industrial (2)
– Main difference is often attributed to planning controls
SUPPLY:
Price Elasticity of Supply
measures the sensitivity of quantity supplied to changes in the
product’s own price:
PES = % change in Qs  % change in price
If price of West One flats rises by 10%, & quantity SUPPLIED rises by
5% as a result, what is the PES?
PES = % change in Qs
= 5 / 10 = 0.5
 % change in P
If the rents rise by 10%, & quantity supplied rises by 20% as a result,
what is the PES?
PES = % change in Qs  % change in P
= 20 / 10 = 2.0
7/21/2022
21
Figure 8: Inelastic Supply
P
P2
Si
b
P1
a
D2
D1
O
Q1
Q
Conclusions: Planning and Price Signals
• Markets allocate resources through the price mechanism
• Prices reflect consumer preferences and producer profit
requirements
• It is argued that planners are insufficiently market aware
• The Barker Review of Housing Supply looked at the extent to
which rapid house price rises in the UK are attributable to a lack
of supply , similarly by “Fixing our Broken Housing Market”
• Barker identifies a number of problems including the effects of
tight development control policies, builder behaviour, etc
• She also suggests that the planning system needs to take
account of price signals
Planning and Price Signals (cont)
• Evans (2000, quotes a planner in a southern District Council)
who says ‘We not see the point of looking at price
data…Planning should lead, no prices. Land price should reflect
planning, not the other way round’
• But what if market reflects consumer (and by extension)
society’s preferences?
• Changes to policy accept that prices should be a material
consideration in planning decisions about how much land to
release for housing
• But, in practice, this is difficult because the workings of land and
property markets are very complex (see future lectures)
Reading
Background Reading: please see them in the Reading
list tab on Blackboard
• Taylor et al. (2017) Principles of Economy
• Sloman , J (2006) Economics
Specialist Reading:
– Barker, K (2004) Review of Housing Supply,
ODPM/Treasury, London (pp40-42)
– Fixing our Broken Housing Market
https://www.gov.uk/government/publications/fixing
-our-broken-housing-market

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