Lecture 2: House prices & Property valuation Flashcards
City housing demand: Fundamental factors ([.]-term impact): 1. [.] growth 2. Household [.] 3. Household [.] 4. [.] rates 5. [..] rate 6. [.] 7. Cost of [.]
City housing demand: Fundamental factors (LONG-term impact): 1. POPULATION growth 2. Household INCOME 3. Household FORMATION 4. INTEREST rates 5. Income TAX rate 6. Employment 7. Cost of RENTING
House value depends on [..] available.
=> “[..]”: quantity of public services relative to [.] (their costs)
- [..] are [.] (reflected/ [.]) in house prices.
House value depends on PUBLIC GOODS available
=> “CAPITALISATION EFFECT”: quantity of public services relative to TAXES (their costs)
- NET BENEFITS are capitalised (reflected/ incorporated) in house prices.
City SUPPLY: - Cost of [.] - Physical structure ([.], cost of [.]/ [.] rates, construction materials) Constraints: - [.] system (UK)/ [.] restrictions (US) - Building [.] / codes - [.] factors - Physical differences in land [.].
City SUPPLY: - Cost of LAND - Physical structure (labour, cost of capital/ interest rates, construction materials) Constraints: - Planning system (UK)/ Zoning restrictions (US) - Building regulations/ codes - Environmental factors - Physical differences in land terrain.
A “[..]” is quick appreciation of house price.
A “housing BUBBLE” is quick appreciation of house price.
Regional determinants of house prices: Regional ECONOMIC drivers: 1. Location Quotient: LQj = (.....) / (....) LQj > 1: j is a [.] (or [.] ) industry in the region. LQj < 1: j is a [.] (or [.] ) industry. 2. Employment multiplier = .../.... => Forecast how [..] in region change if employment in a [.] industry changes.
Regional determinants of house prices:
Regional ECONOMIC drivers:
1. Location Quotient:
LQj = (REj/RE_total) / (NEj/ NE_total)
LQj > 1: j is a BASIC (or DRIVER) industry in the region.
LQj < 1: j is a SUPPORTING (or SERVICE) industry.
- Employment multiplier
= Total employment in region / Employment in base industries in region
=> Forecast how total employment in region change if employment in a basic industry changes.
3 approaches of Home valuation:
1. [.] comparison/ [.] approach:
Subject value estimate = […] +/- [..]
- [.] approach:
Estimate = [.] value + New house cost - [.] - Income approach:
Estimate = GRM * [..]
GRM = […] ~= 4-5% in UK.
3 approaches of Home valuation:
1. Sales comparison/ Market approach:
Subject value estimate = Comparable sales price +/- Feature differences
- Cost approach:
Estimate = Land value + New house cost - Depreciation - Income approach:
Estimate = GRM * Rental Income
GRM = Gross Rent Multiplier ~= 4-5% in UK.
Final appraisal:
Assign subjective weight to each of the 3 values from the 3 approaches.
Mortgage lender will use the [.] value of [.] transaction price and the [.] value.
Major consideration is [..].
Lenders want to ensure that the value of property never [..] the outstanding loan balance.
Mortgage lender will use the LOWER value of ACTUAL transaction price and the APPRAISAL value.
Major consideration is LOAN SECURITY.
Lenders want to ensure that the value of property never FALLs below the outstanding loan balance.
Expectations about [..] helps answer the question of whether now is a good time to buy a house.
Expectations about future appreciation helps answer the question of whether now is a good time to buy a house.
Expected Appreciation in House Price
= EAHP%
= …. ?
Expected Appreciation in House Price
= EAHP%
= (HP_t - HP_t-1) / HP_t-1
Equity a homeowner has in the house:
HE = …… = …..?
At the moment of purchase:
HE = …?
Equity a homeowner has in the house:
HE = HP - L = V - L
At the moment of purchase:
HE = D (Deposit)
Leverage factor
= … / …
= … / ( … )
Leverage factor
= V / HE
= 1 / ( 1 - L/V )
(check my notes to see how to derive this)
Expected Appreciation in Home Equity = EAHE% = ( HE_t - HE_t-1 ) / HE_t-1 =... * .... ? = ... * (....) ?
Expected Appreciation in Home Equity = EAHE% = ( HE_t - HE_t-1 ) / HE_t-1 = EAHP% * Leverage factor = EAHP% * ( 1 / (1-L/V) )
“Wealth effect”:
[..] ~(…)~ [..]?
“Wealth effect”:
(unrealised ) home equity appreciation ~(+)~ Consumer spending
Appreciation
= [.] growth
= [.]
Appreciation
= Price growth
= Return
Geometric average appreciation rate for periods from 0 to T:
= r_G
= …. ?
Geometric average appreciation rate for periods from 0 to T:
= r_G
= [ Căn bậc T ( HP_T / HP_0 ) ] - 1
