Economics of the Property Market
Being a property market economist is like being a child in a toy store: the choice just seems endless. The economics of property or housing markets is ideal for somebody who enjoys applying their economics to topical real world issues and has a keen interest in economic and social policy. The property market offers an economist an abundance of issues; boring it is not!
Dr Dean Garratt, Nottingham Trent University
Seemingly never out of the news, property markets offer economists rich-pickings. Students of property markets may find themselves analysing either the residential or commercial property market or, of course, both. We are all familiar with the residential market as consumers of housing services. And yet, we have experience with the commercial sector too, even if it may not be immediately apparent. The commercial sector relates to those dwelling units used by business, ranging from factory units and office space to retail space on the high street.
So what can we expect to study? Well, one can expect to study the determination of prices. If we take a British perspective, we might find ourselves analysing the seemingly crazy nature of residential house prices. More specifically, can we explain the volatility of house prices and yet, at the same time, explain why over the longer term house prices have increased more quickly than the prices of consumer goods and services? To do this we might try applying demand-supply analysis though we are likely to find that this will require some careful thought. For example, how exactly do we define a ‘housing market’ and what is a ‘unit of housing’?
An analysis of property markets, including issues surrounding pricing, is intrinsically linked to the financial system. Therefore, we can expect to analyse relevant aspects of the financial system. For example, we could analyse the relationship between the availability of credit, such as residential mortgages, the demand for property and the price of property. An interesting development has been the growth of the secondary market for mortgages. It is argued that the willingness of lenders to sell parts of their mortgage book to other financial institutions, in other words, to sell the income yield of these mortgages, has meant that they have relaxed their lending criteria and extended their activities into riskier markets. These markets are known as sub-prime markets.
The recent impact of sub-prime lending on the stability of the financial system is one demonstration of the significance of property markets on national economies. There has been considerable research and policy interest concerning the interaction between property markets and the macroeconomy. For instance, we could analyse the relationship between housing equity (the amount by which the value of property exceeds the loan(s) secured against it) and household spending. Do changes in amounts of housing equity result in short run changes in the growth of household spending? In short, a property economics module is likely to include both micro- and macroeconomic analysis.
A study of property markets may also include an analysis of issues relating to land use, including wider social issues such as the impact and sustainability of new build. Again, this is an example of property’s significance going well beyond its immediate user. It further demonstrates the applied nature of the topic material. As I said at the outset, a property market economist is spoilt for choice!