Factors affecting demand and supply of land

TABLE OF CONTENTS

1.Introduction12.Determinants of the demand for urban land13.Determinants of the supply for urban land44.Constraints for land supply6Bibliography7

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1. IntroductionDefinition of landIneconomics,landcomprises allnaturally occurring resourceswhose supply is inherently fixed. Land was sometimes defined in classical andneoclassical economicsas the "original and indestructible natural resource with perfectly inelasticsupply curve(i.e., zero elasticity) Demand Curve Supply Curve

2. Determinants of the demand for urban land Income The disposable (after tax) income of prospective buyers. "Demand" means desire backed by purchasing power, not just desire alone.Price The term "demand" should always be considered "the quantity demanded at a given price".Cost and availability of finance High interest rates will reduce the amount of borrowings that purchasers can afford, thus depressing the demand for land

Demographic features of the populationThe 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.Physical characteristics of the site Size, gradient, sub-soil, vegetation, prevailing winds, views, etc.Proximity to amenities Schools, shops, parks, sporting facilties, transport facilities, etc.Proximity to employment opportunitiesRental opportunities A thriving rental market might raise the value of land above that which could be obtained in a predominantly owner-occupied area.Multiple occupancy If planning laws permit higher density housing, then the land value may increaseInflation and the expectation of inflation The expectation of future inflation (or capital growth) will make people less unwilling to pay higher pricesGovernment grantsThe 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.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.

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.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.Superannuation and retirement schemes Lump sum payments can boost the market for land as such money is often invested in real estate.Neighourhood effects Surrounding developments etc. Can affect the value of a property. For example, the construction of a high volume 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.

3. Determinants of the supply for urban land

Physical features The supply of land is affected by phyisical features such as rivers, mountains and land gradients.Density of development Physical limitations on the supply of land can be offset to tome extent by more intensive developmentTime period "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.Substitution between uses Even though the total supply of land might be fixed, the supply of land for one particular use (e.g. Residential) could be increased by transferring land from other uses (e.g. Recreational and industrial).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.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 exploit 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 facilitate the development process.

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.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.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.Taxes and land rates 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.Interest rates , 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.

Government charges - eg stamp dutiesOwners 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).4. Constraints for land supply

Environment and LocationAttractiveness of the area, Steepness, topography of the land, Attractive views, Open space, Vacant sites nearby, Traffic noise, Security from crime, Quality of social InfrastructureFinanceIntrest ratesMaximum mortgage (absolute amount), Maximum monthly repayments, Rateable value of the house, Length of time house was on the marketCapital CostsCost of Land, Construction CostOperating CostsTax Rates, Utility Rates, Rental Rates, Labour Costs, Financing, Financial Incentives from GovernmentNon-Financial Factors(some factors have an indirect influence on cost)Proximity to Suppliers, Customers, and Major Markets, Transportation Infrastructure, Land Availability, Lack of Congestion, Labour Availability, Historical Reasons, Government Strategy and Municipal Assistance, Quality of life criteria

BibliographyB, M., July 2003. Somersoft. [Online] Available at: http://somersoft.com/forums/showthread.php?t=12496[Accessed 16 March 2015].