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PHILIPPINE ASSOCIATION OF

REAL ESTATE BOARDS, INC (PAREB)

Gensan-Sarangani REB

REAL ESTATE ECONOMICS


by Maya Bandolon-Cartojano, REC, REA, REB

TOPIC COVERAGE - 4hrs


A. Basic economic concepts
B. Real Estate economics
1. Market characteristics
2. Demand
3. Supply
C. Real Estate Broker's Role
D. Forecast Variables
1. Residential housing construction
2. Macroeconomic trends

a. Inflation Rate Movements

b. Interest Rate movements

c. Foreign exchange rate movements


2

3. Government Macroeconomic
Policies (fiscal policy, monetary
policy, physical policy - housing & u
development programs, energy &
environment programs
E. Factors affecting real estate
value
F Philippine Real Rstate Economic
Trends
G. Current events

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

BASIC ECONOMICS
What is economics?
The study of human interaction
The study of scarcity
The study of resource allocation
The study of production and consumption

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

BASIC ECONOMICS
Needs things that are necessary
for survival

CLOTHES

FOOD
HOUSING
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Real Estate Economics by MayaCartojano 5 April 2015


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BASIC ECONOMICS
Wants things not necessary for
survival but that add comfort
and pleasure to our lives

Real Estate Economics by MayaCartojano 5 April 2015


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BASIC ECONOMICS

RESOURCES
Personal resources time, money, skills we use to satisfy
our wants
Economic resources the means through which goods
and services are produced
Natural resources raw materials supplied by nature
Human resources (also called labor) - people who work
to produce goods and services.
Capital resources (or capital) the tools, equipment, and
buildings that are used to produce goods and services
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Real Estate Economics by MayaCartojano 5 April 2015


REC, REA, REB

The basic economic problem


is

SCARCITY
because we have limited
resources but unlimited wants.
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Real Estate Economics by MayaCartojano 5 April 2015


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BASIC ECONOMICS
You have to make a choice. You have P200 and have
been invited to a movie with a friend but you also want
to buy a new book of your favorite author. You are also
trying to save for Palawan trip during Christmas break.
What do you do?

Opportunity Cost:
The next best alternative what a person gives up to
get something.
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Real Estate Economics by MayaCartojano 5 April 2015


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TWO CATEGORIES OF
ECONOMICS
Macroeconomics: study of the
national economy and its segments
including national income, output,
employment, and growth.
Microeconomics: study of individual
firms and households.

Real Estate Economics by MayaCartojano 5 April 2015


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WHAT IS REAL ESTATE


ECONOMICS?
A study of people & how their actions affect property values.

Study that uses economic principles


Micro and macro analysis
Analyzes trends
Considers supply and demand
Links general economic theory and real estate
practice

General Economics
Principles
and Theory
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Real Estate
Economics

Real Estate
Principles
and Practice

Real Estate Economics by MayaCartojano 5 April 2015


REC, REA, REB

STAIRWAY OF REAL ESTATE


ECONOMICS
Final Real Estate Decision
Investment Analysis
Taxes, Land Usage, and Environmental Controls
Real Estate Market Analysis
Regional and Community Analysis
Real Estate and the National Economy
Governments Role in the Economy
Basic Economic Principles

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Real Estate Economics by MayaCartojano 5 April 2015


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Residential Real
Estate Markets

REAL ESTATE ECONOMICS


Real estate economic characteristics
1.
2.
3.
4.

Fixed supply in short run


Immobile-Local market is
key
Long economic life
Lack of standardization

Key Concept:
Short term movements in prices and rents
caused by changes in demand, not in supply.
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Real Estate Economics by MayaCartojano 5 April 2015


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REAL ESTATE ECONOMICS


What is a market?
A place where buyers and sellers meet to
exchange items of value.
Competition varies directly with:

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Number of buyers
Number of sellers
Homogeneity of units available
Knowledge by all parties vs. advantage over the
other party to distort price or market activity
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

REAL ESTATE ECONOMICS


Characteristics of the Real Estate
Market

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Buyers & sellers are not numerous


Local nature of the market
Number of buyers/sellers for a particular
class of property is usually limited
Number of buyers/sellers is small in
comparison to other commodities
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

REAL ESTATE ECONOMICS


Characteristics of the
Real Estate Market

Real estate is heterogeneous, bulky,


expensive
Each property has a different location
that is permanently fixed

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Combined land, capital & financing is unique

Soil, topography, climate unique


Real Estate Economics by MayaCartojano 5 April 2015
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REAL ESTATE ECONOMICS


Characteristics of the Real Estate
Market
Buyer/Seller knowledge is frequently

poor due to

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Infrequency of entry into the market


Limited number of comparable bids and offers
Complexity of legal requirements needed to
transfer ownership
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

REAL ESTATE ECONOMICS


Characteristics of the Real Estate
Market

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Willingness of buyers/sellers impaired due to


Limited supply of real estate
Limited number of buyers and sellers
Limited financing options for particular
properties
Differences in compulsion to buy by
individuals
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

REAL ESTATE ECONOMICS


Characteristics of the Real Estate
Market
Supply of land is fixed
Land is fixed = fixed supply
Housing units (density) may be increased
Construction time
Average of 2 years to increase/build
units
Short run: supply limited
Long run: supply may be increased

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Real Estate Economics by MayaCartojano 5 April 2015


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Rents and Prices:


Real Estate Demand Curve
Price
or Rent

As Price Decreases,
Quantity Demanded
Increases
& vice versa

P5
M
P4
M
P3
M
P2
M 0
P1M
20

500 1000
2500

1500

2000

Quantity
or Space

Real Estate Economics by MayaCartojano 5 April 2015


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Real Estate Demand


Increase in Demand caused by

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Population
Income
Cost
Government action

Real Estate Economics by MayaCartojano 5 April 2015


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FORECAST VARIABLES
RESIDENTIAL HOUSING
DEMAND VARIABLES
1.

Population
Numbers, Owner Occupied, Demography,
Renters
2. Income
Economic base trends and employment,
Disposable income trends, Discretionary
income for speculation and investment
3. Costs
Cost of household operation, costs of transport
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Real Estate Economics by MayaCartojano 5 April 2015


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FORECAST VARIABLES
RESIDENTIAL HOUSING
DEMAND VARIABLES

4. Credit
Interest rates, Loan-to-value ratios, Payback
periods. Borrower qualifications
5. Other Factors: Tastes and Customs
Single family vs. condominiums, Rent vs. buying

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Real Estate Economics by MayaCartojano 5 April 2015


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Real Estate Supply


Land is fixed
Number of housing units on

land is not fixed.


Increasing supply takes a long
time.
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Real Estate Economics by MayaCartojano 5 April 2015


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Short Run & Long Run Supply Curves


Price
or Rent

Short Run
Supply Curve

P5
M

Long Run Supply Curve

P4
M
P3
M
P2
M 0
P1M
25

500 1000
2500

1500

2000

Quantity
or Space

Long Run Supply Curve is more Elastic


Real Estate Economics by MayaCartojano 5 April 2015
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Real Estate Supply

Increase in supply is caused by:

Construction
Conversion
Demolition
Destruction

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Real Estate Economics by MayaCartojano 5 April 2015


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Forecast Variables Residential


Housing
SUPPLY VARIABLES

1. Rate of New Construction

Construction Cost

Land Availability

Credit for Construction

Demand for Housing


2. Rate of Conversions

Interest rates

Economic base trends

Environmental Constraints

3. Rate of Demolitions

Number of
existing housing
units
4. Rate of
Destructions

Manmade

Natural

Coastal controls, Building


moratoriums sewer and
water

Planning controls

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Zoning, Building
codes
Real Estate
Economics by MayaCartojano
REC, REA, REB

5 April 2015

Assuming a decrease in demand,


supply will change:
As demand falls, vacancies increase
Increased vacancies lead to fall in
rents/prices

Long term effects of rent/price decrease:

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More space available at lower cost


Out-of-pocket costs for least desirable
property
Costs exceed income generated
Abandonment or demolition
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

Real Estate Supply is Fixed in the ShortRun


Price
Supply
P5
M
P4
M

Demand

P3
M
P2
0 500 1000
M
2500
29P1M

Rents and
Prices change
with shift in
Demand

1500

2000

Quantity

Real Estate Economics by MayaCartojano 5 April 2015


REC, REA, REB

Compare Price/Rents when Demand changes with


Fixed Supply
Supply

Fixed
Supply

Price
Price

Equilibrium

Deman
d
Lower
Deman
d

Demand
Quantity
Short term price changes caused by demand

Quantity
Decrease in Demand equals Decrease in Price

Fixed
Supply
Price

New

Higher
Demand

Old
Quantity
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Increase in Demand equals


Increase in Price/Rent

Demand

Real Estate Economics by MayaCartojano 5 April 2015


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Supply * Demand
Old
New
Supply Supply

Old
Supply

New
Supply

Old
Price

Price

New
Price

Same
Demand

Quantity

Increase in Supply when Demand remains same


will lower Price or Rent Over Building
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Real Estate Economics by MayaCartojano 5 April 2015


REC, REA, REB

If there is an increase in demand


Increased demand reduces vacancies
Reduction in vacancies increases rents and
prices bid for short-term fixed supply
Those who cannot afford higher rents/prices:

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Share space with others


Move to less expensive property
Increase density and intensity of use

Real Estate Economics by MayaCartojano 5 April 2015


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Inevitable Real Estate Cycles

Characteristics of Real Estate that leads to cycles:


Large economic and physical size
Need for debt
Government regulation

Typical Real Estate Cycle


Construction
begins and
accelerates as you
move up the curve
while vacancy
continues to
decline

Vacancy
increases yet
construction
continues unable
to stop

Vacancy declining and


no construction
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Vacancy increases at a decreasing


rate, some construction

Real Estate Economics by MayaCartojano 5 April 2015


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If there is a decrease in demand


Increased vacancies
Decline in rents and

prices
Lower rents/prices
leads to:

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Moving up to higher
price area
Reduced density
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

Assuming an increase in demand,


supply will eventually change:
Profit motive: Demand pushes rents & prices
up
Construction increases (if no growth limits)
Supply overtakes increased demand,
vacancies increase
Vacancies lead to falling rents and prices
Lower rents/prices:

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Difference between building costs/rents/sales


narrows
No longer profitable to build
Real Estate Economics by MayaCartojano 5 April 2015
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Rent controls

Rents are high because demand exceeds


supply
To rebalance the market:

Demand must decrease


Supply must increase

Rent controls tend to:

Increase demand by keeping rents low


Decrease supply by maintaining low rents
Low returns for investors reduces construction
Usually politically motivated
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Real Estate Economics by MayaCartojano 5 April 2015


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REAL ESTATE ECONOMICS

Real Estate Market


Imperfect market compels buyers and

sellers to use a real estate professional


Professional has higher knowledge of
legal and technical aspects

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Real Estate Economics by MayaCartojano 5 April 2015


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Real Estate Brokers Role


Client/customer rely upon brokers expertise
Be a knowledgeable, ethical broker help
overcome market imperfections:

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Updated on increase/decrease in demand & supply


Updated on market trends and transaction details
Awareness of rents/prices
Advice on available types of profitable
investments
Lead principals through legal complexities
Give financing sources and alternatives
Real Estate Economics by MayaCartojano 5 April 2015
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Real Estate Sub Markets


Occupancy The desire to receive direct
services from the property
Investment The desire to receive services in
the form of a profit

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May be non-monetary rewards


Prestige/pride of ownership

Real Estate Economics by MayaCartojano 5 April 2015


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Supply and Demand


The Real Estate Asset Market (Property Market)

Supply
Investors
Wanting to Sell

Market

DEVELOPERS
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Demand:
Investors
Wanting to Buy

BUYERS

Real Estate Economics by MayaCartojano 5 April 2015


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Supply and Demand


The Space Market
Supply
Property Owners
(Landlords)

LESSORS

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Market

Demand:
Property Users
(Tenants)

LEASEES

Real Estate Economics by MayaCartojano 5 April 2015


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Residential

Own
Rent

Commercial

Own
Rent

Office

Own
Rent

Industrial

Own
Rent

Residential

Own
Rent

Commercial

Own
Rent

Office

Own
Rent

Industrial

Own
Rent

Investment

1-4 Family
Multi-Family

Real Estate
Market
1-4 Family
Multi-Family
Occupancy

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Real Estate Economics by MayaCartojano 5 April 2015


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Real Estate Economics by MayaCartojano 5 April 2015


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MACROECONOMIC TRENDS
AFFECTING REAL ESTATE VALUE
REAL ESTATE SUPPLY FACTORS
o Housing Supply
o New Construction Activity
o The Supply of Vacant Land
REAL ESTATE DEMAND FACTOR
o Population
o Purchasing Power

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Real Estate Economics by MayaCartojano 5 April 2015


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MACROECONOMIC TRENDS
AFFECTING REAL ESTATE VALUE
NATIONAL GOVERNMENT ACTIVITY
o Housing and Urban Development Programs
o Energy and the Environment
o Government Banking and Monetary Policies
o Fiscal Policies
o Physical Policies

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Real Estate Economics by MayaCartojano 5 April 2015


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FACTORS AFFECTING
REAL ESTATE VALUE
PHYSICAL FORCES
o Natural Resources
o Developed Resources
SOCIAL FORCES
o Family size and age-group distribution
o Neighborhood stability and attitudes about property
o Population growth, decline, or shifts at the community,
regional and national levels
o Life-styles and living standards, often combined with
other forces
o Attitudes about law enforcement, the role of government
and individual responsibility
o Attitudes about development, growth and ecology
o Attitudes toward public education
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Real Estate Economics by MayaCartojano 5 April 2015


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FACTORS AFFECTING
REAL ESTATE VALUE
POLITICAL FORCES
o Zoning and land-use regulations
o Building and safety regulations
o Environmental protection laws
o Police, fire and health protection services
o Crime preventions, education and recreation services
o Public works; power, water, transportation, sewers and
flood control
o Fiscal policy and taxation
o Monetary policy and controlso Governmentsponsored urban redevelopment and housing finance
programs
o Regulation of industry and business
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Real Estate Economics by MayaCartojano 5 April 2015


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CONCERNS FOR BOTH


SUPPLY AND DEMAND
IMPACT OF ENERGY SHORTAGES
IMPACT OF INFLATION
1. Actions of BSP Reserve
1. Transportation: Number of
2. Speculators seeking gains
highways and cost of travel
3. Rates of returns
2. Utility rates
4. Fiscal policy of
3. Size of homes
government
5. Property and income taxes

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Real Estate Economics by MayaCartojano 5 April 2015


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Macroeconomic Policies
Fiscal Policy

Physical Policy

Related to budget,
government
expenditure, taxation

Related to overcoming
specific problems of the
economy

Monetary Policy
Related to money
supply, exchange rate
control and bank rate
control

Fiscal Policy
Use of Government Expenditure, and taxation to manage the economy.

Purpose of Fiscal Policy


Stabilise economic growth, avoiding the boom and
economic
BIR: bust
Income
Taxes cycle

Tariffs -Import Taxes


& Duties
DBM: Budget Management
Fiscal Spending
Variables affected by Fiscal Policy in the economy Governement Loans
& Payments

Aggregate demand and the level of economic activity


The pattern of resource allocation
The distribution of income.

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Real Estate Economics by MayaCartojano


REC, REA, REB

Physical Policy
Meant to affect only strategic points of the economy

Purpose of Physical Policy


Overcome specific problems such as pricing of particular commodity,
shortages or surpluses developing in the economy etc.
Price Quotas
Price Ceilings/ Floor
Labor Laws/Rates
Variables affected by Physical Policy in the economy Subsidies
Product Bans

Price and distribution of specific commodity


Investment and production
Foreign Trade
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Fuel Prices
Inflation Rates
Interest Rates

Real Estate Economics by MayaCartojano 5 April 2015


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Monetary Policy
Regulation of supply of Money and Cost and Availability of Credit in the
economy
Purpose of Monetary Policy
Maintain price stability, ensure adequate flow of credit to the
productive sectors of the economy and overall economic growth

Variables affected by Monetary Policy in the economy


Interest Rates
Liquidity
Credit Availability
Exchange Rates
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Interest Rates
Savings

Real Estate Economics by MayaCartojano


REC, REA, REB

Available Credit
Market Activity
5 April 2015

Monetary Policy Influence


Policy Variables
- Money supply
- Liquidity conditions

Target Variables
-Inflation

- Inflation

-Interest rate
-Real GDP
-Employment

Policy Instruments
Discount Rates (loan fr BSP)
- Interest Rates (loan to clients)

-Consumption
-Savings
-Investment

- Reserve Requirements

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Real Estate Economics by MayaCartojano 5 April 2015


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REAL ESTATE ECONOMICS


INTEREST RATES
- Availability of credit influences RE
Development and RE Market
Available Credit/Loans
More active market
More RE Buying
More RE Development

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Interest Rates
Savings

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

MONETARY POLICIES

Interest Rates
Savings

Lending
Public Spending
Business Investments
RE Buying

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Real Estate Economics by MayaCartojano5 REC,


April REA,
2015REB

Compare Current Market


Indicators

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Number of deeds recorded


Number of loans: conventional, DVA, FHA
Foreclosure rates
Trends in rents and resale prices
Building permits/subdivision activity
Construction costs
Vacancies (utility company; change of address)
New home inventory
Classified section activity
MLS, including price changes
Local population trends
Government housing support programs
Real Estate Economics by MayaCartojano 5 April 2015
REC, REA, REB

Interest Rates Movement


Boost Economy after
2001 Slowdown /
dotcom bubble

Stable IR from
2004 to 2006
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Rise in IR to control liquidity,


due to Heavy Capital Inflow &
to curb RE Appreciation

IR hikes to
curb inflation

IR Cuts to boost
Economy

Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

Inflation Movement
IR hikes proved to
Be effective
To curb Inflation

Uncontrolled Inflation despite


Further IR hikes

Inflation Down on account


of global credit crunch

http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
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Real Estate Economics by MayaCartojano REC, REA, REB 5 April 2015

Interest Rates Movement


Market Driven

Controlled

Banks to make available more


funds
& More Efficiency
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Real Estate Economics by MayaCartojano 5 April 2015


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Exchange Rate Movement

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Sterilization to
Control peso
Appreciation

Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

CASH FLOW
= PASSIVE INCOME
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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

MORE INCOME
RENTAL YIELD is more
than
BANK SAVINGS RATE
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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT
LEVERAGE
(CAN BE USED AS

COLLATERAL)

BANK
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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

INFLATION

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HEDGE AGAINST
INFLATION

Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

INFLATION VS.
CAPITAL GAIN RATE

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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

FLEXIBILITY /
EXPANDABILITY

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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT

TAX

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DEPRECIATION
(HEDGE VS TAX)

Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT
POWER OF
AMORTIZATION

5 April 2015

Real Estate Economics by


MayaCartojano REC, REA, REB

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ADVANTAGES OF

REAL ESTATE INVESTMENT


PREDICTABILITY/
CONSERVATIVE

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Real Estate Economics by MayaCartojano 5 April 2015


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ADVANTAGES OF
REAL ESTATE INVESTMENT
LIFETIME
INVESTMENT

LEGACY
RETIREMENT
MID-LIFE STATUS

YOUNG FAMILY
NEW COUPLE

SINGLE STATUS
5 April 2015

Different Lifestyles, Life


Cycles, Personal Goals,
Levels of Wealth70
Real Estate Economics by

MayaCartojano REC, REA, REB

Gross Rental Yields - Philippines Compared


to Continent

10.99%

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Real Estate Economics by MayaCartojano 5 April 2015


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House Price Changes, 5 Yrs (%) - Philippines


Compared to Continent

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Real Estate Economics by MayaCartojano 5 April 2015


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