Economics, Real Estate & the Supply of Land

Citation

Ooi, J. (2005), "Economics, Real Estate & the Supply of Land", Journal of Property Investment & Finance, Vol. 23 No. 5, pp. 471-472. https://doi.org/10.1108/14635780510616052

The three primary factors of production are capital, labour and land. Whilst there have been substantial work both on the supply of labour and the supply of capital, no theory of the supply of land has been constructed. This is attributed mainly to the dominance of the Ricardian theory which assumes that the supply of land is fixed. Economics, Real Estate & the Supply of Land, authored by Professor Alan W. Evans of the University of Reading, attempts to address the shortfalls by setting out the economic theory of the land market. Comprising 19 chapters, the book brings together in a coherent whole various approaches to the analysis of the supply of land for development. The four major themes of the book are:

1. 1.

   The Ricardian theory with its assumption of an inelastic supply of land handicaps our understanding of the land market.

2. 2.

   Land owner has a role to play in terms of the supply of land for a use. In particular, the owner has to make decisions as to what to do with the land and when to act.

3. 3.

   The decision, however, is hampered by an inefficient property market. As a result, property price can be influenced by other extraneous factors such as the bargaining positions and abilities of the participants and the real estate agents.

4. 4.

   Owing to the fixed location of each piece of land, the contiguity of smaller sites is very important to assemble a huge development site.

In the first few chapters, the author sets out the basic demand‐oriented theory of rent and land value, as it was developed by the classical and neoclassical economists. Chapter 2 provides a good background on the theory behind land value. Chapter 3 went on to integrate the theory of land value with the theory of the supply of real property. It shows why higher values will lead to a more intensive use of urban land.

Chapters 4 and 5 discuss the implications and consequences of an inefficient land market. Chapters 6 and 7 offer three interesting theories on why land may not always be utilised at their highest and best use to yield the highest current income. The three primary reasons identified are speculation, the benefit of waiting in the presence of uncertainty and owners' sentimental attachment to land. Chapter 8 further demonstrates that the rate of development and the price of land for development would be related to the owners' degree of attachment to the land they owned.

Chapter 9 looks at the land market from a more political viewpoint. Chapters 10 and 11 introduce the twin concepts of “monopoly rent” and “absolute rent”. Chapter 12 returns to the analysis of the consequences of the imperfection and inefficiency of the land and property market. Chapter 13 models why developers engage in land banking, whilst the problem of contiguity is considered extensively in Chapters 14, 15 and 16. Chapters 17 and 18 consider the economic effects of the taxation of land and property. Finally, Chapter 19 summarizes and recapitulates the main themes of the book.

Having combed through the literature in our recent studies on the dynamics of land pricing (Ooi and Sirmans, 2004; Ooi et al., 2005), I find this book excellent in the way it brings together in a coherent whole various approaches (which have been carried out over the past 20 years) to the analysis of the supply of land for development. The issues covered are pertinent for both practitioners and academics in providing a useful theoretical framework based on sound economics. Overall, this new title is an excellent addition to the Real Estate Issues[1]. Like other books in the series, Economics, Real Estate & the Supply of Land has a theoretical emphasis which will appeal to economists and researchers alike. Despite the theoretical emphasis, the book is well written and enjoyable to read.

Personally, I have benefited from the author's clear and in‐depth thinking in this field. As a researcher, the numerous economic models provided in the book will be very useful to provide the necessary framework to underpin further research in this area. As a lecturer in Real Estate Development, the book will help the students to better understand the dynamics of the land and property market as well as relevant land strategies to adopt. This is essential knowledge for any aspiring developers since land is the essential factor of production and in comparison with other phases in the property development cycle, the land acquisition stage is probably the most uncertain and risk part of the process. In particular, the common mistakes made by both economists and practitioners relating to their understanding of the land and property market, as constantly highlighted by the author, are worth taking notice. This book will definitely be included in the list of reference readings for my students.

Notes

Real Estate Issues is an international book series presenting the latest thinking into how real estate markets operate. The books in the series have a strong theoretical basis – providing the underpinning for the development of new ideas.