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					Reece Elliott,                                                                              Econ 205
Jeremy Desrochers,                                                                          Pascal Courty
Nick Earl,
Ray Helgason

                                   Industry Project: Real Estate
Question 1:

        In the real estate industry, the fixed costs are most relevant to cost structure. The fixed costs
include: the cost of the property, and a property’s property tax – 0.4741% (“Tax Rates”, 2010). It is most
relevant because in order to gain entry and become a player in the market a property must be owned
and the fixed cost must be paid. Further, property taxes change in the long-run as property valuations
change, and as a consequence the owner will pay more tax on a property. This is because in the short
run, these costs are already invested and can’t be gotten back once they are paid, they are sunk costs –
they shouldn’t be taken into consideration when making a final sale. What should be taken into
consideration is whether there is more value to be gained from selling the property versus keeping it.
The entry cost into the real estate market ranges from hundreds of thousands to millions of dollars
depending on which segment of properties you are able and willing to buy. The real estate market is
very competitive due to the simple fact that most people don’t want to be homeless and are willing to
pay a large portion of their salary to have a home. In the real estate market variable costs include: a real
estate agent, renovations, advertising, and utilities. A property owner can choose to sell a property
himself in order to save the interest paid to a real estate agent. In contrast, if the owner decides to use a
real estate agent he will have to pay the agent a percentage of the amount that the property was sold
for. Further, renovations can be done to increase the resale value and to make a quicker sale, however
this cost depends on the owner’s eagerness to make a profit or sell quickly. Advertising through
newspapers or flyers are a cost to the owner of a property, but if they have a real estate agent this cost
is eliminated because it is a service provided by the agent. Economies of scale do not related to the real
estate market; the average cost does not decrease overtime for a house as more properties are bought.
Economies of scope are similarly unrelated to housing. In real estate the experience curve would be
related to the buying and selling houses more efficiently. Knowing when to sell high and buy low in
order to make profit is something that is acquired with some experience. It can be assumed that
someone with little experience won’t attain as much supplier surplus as an experienced realtor would.
In conclusion, the real estate market is highly competitive because there are so many segments in which
a buyer can buy up to the point where marginal cost equals marginal benefit. There is such a large
variance in property prices which is dependent on location, size and appeal.

Question 2:

        Like most markets, there are many demand drivers within real estate. Consumers are influenced
by drivers like taste or preference: a family would likely consider property close to a school more
valuable and likewise, a wealthy professional might want to be situated more closely to downtown
Victoria. Other demand drivers include the opportunity costs associated with purchasing and owning a
property. A consumer must consider the alternatives as substitutes such as renting property or even
changing cities are both logical options if purchasing property in Victoria doesn’t provide a great enough
benefit. If rents go down relative to the price of owning, one could find a shift from real estate to renting
and if the price of housing in a nearby city were to decrease relative to Victoria’s, one could find a shift
out of Victoria and into that particular city. As the availability of substitutes increases, the revenue
gained from real estate would likely decrease. Furthermore, another demand driver is the expectations
of a consumer – if a consumer thinks a property’s value is going to increase in the future, they might
consider buying now, whereas the opposite is also potentially true if the consumer thinks a property’s
value is going to depreciate. Another demand driver is the interest rates on bank loans. A high interest
rate will make taking out a mortgage less attractive whereas a low interest rate would result in
increased demand for loans for purchasing real estate. The last driver of demand, and perhaps the most
important, is a consumer’s income. Considering the average price of a house sold in Victoria in the
month of October was $641,780 (Sampson, 2010), it is plain to see that purchasing property is a large
investment. A consumer’s income affects how elastic they are towards the real estate market in that
they will likely be willing to pay more for a given property if they have a greater income. In this light, we
find that the housing market is also segmented. While more expensive houses are catered to families
and those with relatively high income, other products such as less expensive condominiums and
townhouses are available to singular residents or those who simply cannot afford more expensive
housing. As for how the demand affects revenue, we find many trends. First of all, it is found that
demand for housing follows a pattern relative to the time of year. While there are also more listings
(more supply) during the spring and summer times, it is important to note that a larger percentage of
the real estate supplied is also purchased during these times compared to the other times of year.
“Figure 2” shows this as a higher number of properties for sale in the market is correlated to a higher
number of properties sold. This also illustrates a fundamental idea of economics – an increase in supply
will increase the equilibrium quantity and should as well decrease the equilibrium price. Although there
is an influx in supply at this time, demand is also booming and so there are more profits to be earned.
The main threat to real estate is a recession in the economy. Because the main demand driver is the
income of the consumer, a contraction in the economy and thus a decrease in the income of the
consumers would result in a decrease in demand as they switch from a normal good which is their house
to an inferior good - an alternative. Conversely, the main opportunity in real estate is a boom in
economy. As consumers’ incomes increase, they become more elastic to housing prices and the
suppliers can make more revenue.

Question 3:

        The attractiveness of the real-estate industry in greater Victoria is very high. Victoria boasts one
of the most moderate climates in Canada and has many attributes which make owning real estate in
Victoria more desirable. Figure 2 shows a relationship between the total listings and sales throughout
the past two years. The trend illustrates that sales are generally lowest in the start of the winter months
and pick up when Victoria’s winter concludes around March – that real estate sales are linked with time
of year. The B.C. real-estate association predicts sales to drop by 19% this year compared to the last,
however, a 5% recovery is estimated for 2011 sales. (Wison, 2010). Accordingly the price of single family
homes is expected to increase for the remainder of this year and then decrease as we move further into
2011 (Wilson). Reasons for this predicted fluctuation in sales and price in the real-estate industry include
an increasing population in Victoria as well as low interest rates. The increasing population is a key
element for increasing the demand for housing and the lower interest rates will provide capital for those
who are unable to afford houses on their own earnings. There are many buyers and sellers in the
housing market thus giving each player little power. The main barrier to entry is having sufficient capital
to own a house (the fixed cost of purchasing a home) and minimal if any variable costs in maintaining a
property. Therefore the market is open to entry and exit if a player has enough funds or if interest rates
are low enough to allow a player to borrow this capital. Victoria is a very desirable city to live in due to
its beautiful landscape and mild climate. These factors increase the attractiveness of Victoria’s real-
estate market. This being said, the increase in population in Victoria means that more people need a
place to live. Therefore, the housing market should grow. Finally, an increase in the demand of
properties will raise the average price of housing and as a consequence, this makes Victoria's housing
market an attractive industry. However, the constant uncertainty of this market due to its inconsistent
fluctuations in pricing and sales still makes the future performance of the market uncertain.
(1459 words)

Figure 1




 Figure 2
Bibliography

Victoria Condos for Sale. Retrieved November 20, 2010, from
http://canada.condo.com/ForSale?view=list&loc=65709

Buying a Property in Canada. Retrieved November 20, 2010, form
http://www.assignmentscanada.ca/buyingincanada.html

(2010). Tax Rates. Retrieved November 21, 2010, from
http://www.saanich.ca/living/tax/propertytax.html#tax

(2010). What’s New. Retrieved November 20, 2010, from
http://www.victoria.ca/cityhall/departments_fincon_tax.shtml

Sampson, M. (2010). Real Estate Sales Rise in October. Retrieved November 20, 2010, from
http://www.vreb.org/mls_statistics/current_statistics.html

Wislon, C. (2010). Victoria home sales down 19 per cent. Retrieved November 22, 2010, from
http://ca.news.yahoo.com/s/11112010/72/bc-victoria-home-sales-19-cent.html

				
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