Land Market and Management

Factors affecting
demand and supply of
land
Assignment-1

Submitted By
Ch. Sravya Ratna
SPA/NS/RP/1195,
Semester-II,
M.R.P.

Department of Regional Planning,

School of Planning and Architecture, New Delhi
0

TABLE OF CONTENTS
1. Introduction...........................................................................................1
2. Determinants of the demand for urban land.........................................1
3. Determinants of the supply for urban land............................................4
4. Constraints for land supply....................................................................6
Bibliography................................................................................................7

1. Introduction
Definition of land
In economics, land comprises

all naturally

occurring

resources whose supply is inherently fixed.

1

Land

was

sometimes

defined

in

classical

and neoclassical

economics as the "original and indestructible natural resource with

perfectly inelastic supply curve (i.e., zero elasticity)

Demand
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 population
The 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 opportunities
Rental 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
increase
Inflation and the expectation of inflation
The expectation of future inflation (or capital growth) will make people
less unwilling to pay higher prices
Government grants
The 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 development
Time 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 duties

6

Owners 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 Location
Attractiveness of the area, Steepness, topography of the land, Attractive
views, Open space, Vacant sites nearby, Traffic noise, Security from crime,
Quality of social Infrastructure
Finance
Intrest rates
Maximum mortgage (absolute amount), Maximum monthly repayments,
Rateable value of the house, Length of time house was on the market
Capital Costs
Cost of Land, Construction Cost
Operating Costs
Tax Rates, Utility Rates, Rental Rates, Labour Costs, Financing, Financial
Incentives from Government
Non-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

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