Week 9

Question 1

define a neighbourhood

Answer 1

A cluster of properties of relatively similar land use and value.

Question 2

neighbourhoods exist because of

Answer 2

o	Topography
o	Transportation - proximity
o	Social (including education level, income, cultural facilities, shopping)
o	Political
o	Employment
o	Characteristics of the people 
o	Similar land uses cluster together
o	Land conflicts can exist – eg airport/residential

Question 3

explain victorian zoning

Answer 3

Commercial

• Industrial
• Mixed Use
• Residential
• Agricultural
• Public use

Question 4

explain house and land package

Answer 4

When purchased in Victoria
• Consist of Land Contract of Sale (LAND Portion) & Fixed Price Building Contract (Building Portion)
• Valuation of the property will be based on the value of the land + finishing product of the property
Example: Similar/identical building comes with different Price because of different Neighbourhood environment (Suburb)

Question 5

explain neighbourhood boundries

Answer 5

• Sharp (topographical/geographical features eg. Lake)
• Soft/Vague – gradual merge of neighbourhoods
• Political boundaries – local council wards, state, federal
• Defined boundaries – industrial developments, CBD (existing cluster)

Question 6

Driving or forces of change in neighbourhoods:

Answer 6

Physical Factors - floods, bushfires, earthquakes, tornados, slides, new infrastructure (roads/freeways) etc.
o North East Link to complete the freeway ring
o Affected area - buildings will be demolished
o Area will be divided by the freeway into two zones

Political Factors -taxation, education, health and police services, change in zoning laws, radical council vs conservative council, etc.

Social Factors - age distribution of population, religious, education, lifestyles - can cause conflict
o Same suburb can have price different because of the divided school zone
o School Zone Price Growth can be like 41.3% within a year (Glen Huntly Primary School)

Economic Factors – neighbourhood transitions to lower income use as buildings age; economic stability and employment, infrastructure,

Question 7

signals of a changing neighbourhood

Answer 7

o Condition – deterioration, age of improvements, maintenance, style, etc.
o Turnover Rate – age distribution – as community ages expect increased sales, high turnover may reflect unpleasant conditions, what is normal turnover? Commercial/industrial low; residential areas differ
o Use Change - new development, redevelopment , demolishment, zone changes
o Density of Occupancy - dividing of space for other users – renting out rooms, leasing factory space

Question 8

explain neighbourhood cycle

Answer 8

Development
o Vacant land, new builds

Maturity
o All land has been developed; construction has slowed; building condition good, occupancy stable

Decline
o Ageing buildings, deterioration, signs of decay (depends on desirability of locations – do they age well?)
o Redevelopment
o

Question 9

define obsolesence

Answer 9

Obsolescence – physical, functional and economic 
Change in use
•	Redevelopment
•	Change in density of use
•	Change in occupancy
Preservation/Stabilization
Neighbourhood renewal

Question 10

main type of behavioural obsolescence that affects property

Answer 10

behavioural
 - physical
 - locational
 functional
 exogenous
 endogenous

Question 11

explain building obsolesces

Answer 11

ageing, wear, weathering, fatigue

poor design/construction/maintenance/management

Question 12

explain location obsolesce

Answer 12

impact of nearby construction, traffic, pollution
gov’t tax regulation, rising standards technology

filtering social deprivation, criminality, urban blight
shrinking demand competitive options, technology, fashion

Question 13

what is functional obsolesence

Answer 13

results from outdated designs and features

• often cause by ageing or poor design
  e. g. bad floor plan, too few bathrooms, outdated fixtures, unattractive style

-look at building utility graph

Question 14

explain value of property

Answer 14

The value of property is a function of the physical property itself and its’ usefulness
Size – large/small house, large/small block
Physical features include:
•	Age
•	Condition
•	Quality
•	Charm
•	Renovation 
•	Mechanical features

Question 15

explain the rehabilitation cycle

Answer 15

Neighbourhood life cycles
Recovery period signs
Interruption by a major change in land use – Port of Melb
THINK INNER CITY MELBOURNE

Rehabilitation Cycle:
• Recovery
• Gentrification

Gentrification – suburb improvement with wealthier residents
Cycles – decay & rebirth
How do these all affect the
underlying land value?
• Initially – low incomes, high turnover & house prices fall substantially
• New occupants rehabilitate and remodel houses
• Prices and rents increase, residents are “priced out”

Question 16

ways to address obsolesence

Answer 16

• Redesign
• Transformation
• Repositioning
• Revitalizing, upgrade
• Improve location
• Apply additional actions and positive marketing.

Question 17

explain land value

Answer 17

is the difference between the value of what is produced on the site and the cost of producing it there.

o Supply of land
o Demand for land

Question 18

explain the residual theory of land value

Answer 18

• Mobile factors of Production - paid market values
• Land is immobile….gets residual only
Consider a clothing factory
* look at graph*

value of finished output:
-clothing products

Costs of production:

• costs of goods sold
• raw materials and energy
• labour

Gross margin:

Cost of capital:

Residual / remainder (available to pay land rend)

• Land gets only the residual value as is “trapped” but also get ALL of the residual value
• Eg. If output increased to $11,000,00 mobile factor costs remain the same, land would claim $1,100,00 per year
• As lease expires, rent would increase

Question 19

explain equilibrium, HBU and competition

Answer 19

Competition in the land market…
Demand side of land market:
• Potential land users compete against each other for sites.
Supply side of land market:
• Potential sites compete against each other for users (tenants).

With “perfect competition,” the equilibrium result will maximize the total value of all the land (and this will maximize the value of all production).
The result is each land parcel being used at its “Highest & Best Use” (HBU) - each site is used in most productive way for that location.
However – property may not comply with the rules!
Multiple factors that may ‘curtail’ ‘bend’ or ‘prevent’ highest and best use being achieved
• Transportation costs – moving inputs/outputs
• Travel time for passengers

* look at clothing factory table*

Question 20

define bid rent

Answer 20

Maximum land rent a potential user would be willing to pay for a given location (same as the land residual value)

Question 21

define bid rent curve

Answer 21

shows how a potential user’s bid-rent changes as a function of distance from some central point

Question 22

define the ‘central point’

Answer 22

The “central point” is the point at which transport costs are minimized (bid-rent maximized) for the given use.
Each potential use has its own bid-rent curve (and central point

**look at diagram*

Question 23

Equilibrium in a well functioning land market: leads to

Answer 23

Equilibrium in a well functioning land market:
Minimization of aggregate transport costs
è Maximization of aggregate land value.
“Bid–Rent” = Maximum land rent a potential user would be willing to pay for a given site /location (Equals residual value.

Question 24

bid-rent capacity as a function of transport costs

Answer 24

• Value dependent on transport
• “Bid-Rent” = Maximum land rent a potential user would be willing to pay for a given site (location).
(Equals residual value.)
• “Bid-‐Rent Curve” shows how a potential user’s bid‐rent changes as a function of distance from some central point.
• The “central point” is the point at which transport costs are minimized (bid-rent maximized) for the given use.

Question 25

BID Rent functions of 3 different land uses with differing productivity & sensitivity to Transport Costs (Same central point

Answer 25

Use A: Most productive use, Most sensitive to transport costs.
Use C: Least productive use, Least sensitive to transport costs.
Use B: Is between the other two in both respects
Each use prevails where its bid-rent curve is highest.

*see diagram

Cities may be polycentric because different land uses have different and multiple central points

Question 26

variations to bid theory

Answer 26

In real life environment
o Apart from CBD acting as a centre, there are other sub-centres.
o Other suburb/town centre which can perform similar functions
o Improvement of Transportation and Telecommunications mean other sub-centres gain favour in retailing, commercial, distribution and industrial activities

see diagram

Question 27

What determines the boundary of a neighborhood?

Answer 27

The boundaries of neighborhoods – where does one end and another begin?

Neighbourhood boundaries occur where the location starts to change.

For example: The blurring that occurs in the transition zone (ring 2, in the concentric ring theory) where you have warehouses, light industrial merging with low income housing.

Neighbourhood boundaries occur when locations begin to change, for example:
Sharp (topographical/geographical features eg. Lake)
Soft/Vague – gradual merge of neighbourhoods
Political boundaries – local council wards, state, federal
Defined boundaries – industrial developments, CBD (existing cluster)
New Urbanism
Mixed-use buildings
Commerce on lower floors, residential above

Question 28

What are the forces that cause neighborhoods to change?

What are the visible effects of neighborhood change?

Answer 28

Drivers of neighborhood change:
Physical Factors - floods, bushfires, earthquakes, tornados, slides, new infrastructure (roads/freeways) etc. Natural disasters have the most effect on neighbourhoods – changing them instantly and often permanently. Ie don’t rebuild after bush fire or severe flood.
Political Factors -taxation, education, health and police services, change in zoning laws, radical council vs conservative council, etc.
Social Factors - age distribution of population, religious, education, lifestyles - can cause conflict. Congregations (eg Jewish, Muslim) tend to congregate and live near their temple/mosque.
Economic Factors – neighbourhood transitions to lower income use as buildings age; economic stability and employment, infrastructure, etc.

Condition - age of improvements, maintenance, style, etc. Does a neighbourhood age at the same time – eg cluster of 1950-60’s housing
Turnover Rate - this includes age distribution, unpleasant conditions, etc. What changes occur due to turnover…is it people wishing to live in a favourable school zone? Is it empty nesters who are downsizing?
Use Change - new development, redevelopment, zone changes, etc.
Density of Occupancy - dividing of space for other users, etc.

Question 29

how to handle problems of obsolescence

Answer 29

Identify the problem – poor construction, poor design, weak market position or poor location
Redesign to correct poor construction/poor design
Rehabilitate, renovate, extend, upgrade
If can correct the problems – re-market
If can’t correct problems transform (new use) or demolish

Question 30

Whatis the relationship between the most profitable use and land value? Arethere any other factors that may influence this relationship

Answer 30

All factors of production are paid and EQ price equal to the marginal value of
what it contributes to the production process – this includes land
Competition in the land market will drive the uses of land to most profitable use and land value
Demand side of land market:
Potential land users compete against each other for sites.
Supply side of land market:
Potential sites compete against each other for users (tenants)
Land owners will only rent to those willing to pay the highest rent (so land use and profitability are linked)

Let’s check the next question related to this issue

Question 31

Explain the residual theory of land value. Why is land value only the residual after other factors have been paid?

Answer 31

Residual Land Value (RLV) : Difference between the value of what is produced on the site and the cost of producing it there.
Residual land theory suggests that the three more mobile factors of production (raw materials, labour and capital)  Have to be paid first/earn a normal rate of return, in order to keep them from “running away” – ie seeking another site/location.
Land is last in line to get paid among the inputs, as it is “trapped”…cannot go elsewhere.
Land get ALL the residual of left over value, the extra profit would be captured in the long run by new leases reflecting the increased value.

Question 32

What is bid-rent, and what is the relationship between the bid-rent and the residual value of land?

Answer 32

Bid-Rent” = Maximum land rent a potential user would be willing to pay for a given site (location). (Bid-rent equals residual value of land)

“Bid-‐Rent Curve” shows how a potential user’s bid‐rent changes as a function of distance from some central point.
The “central point” is the point at which transport costs are minimized (bid-rent maximized) for the given use.
Each potential use has its own bid-rent curve (and central point).

The below diagram shows the interaction of revenue and production costs. There will be a positive LRV (the hatched area under the revenue curve).

Once we introduce transportation costs and they increase the further you are away from the central point, finally get to distance N, where the total costs (production and transport) are equal to the revenue. At this point there is no rent, no residual value.

see diagram

Question 33

What is the relationship between the rent gradient and transportation costs in a homogenous monocentric city?

Answer 33

The EQ land rent gradient around that point will be determined by the highest bid-rent curve at each location, as indicated by the thick red line tracing out the highest bid-rent functions. We have 3 different uses of the site around a central point:
Use A – the more productive land use with the greatest sensitivity to transportation costs will outbid the other land uses near the center.
Use B is somewhere in the middle. Note on the hand-drawn diagram the area where each ‘use’ will locate.
Use C has the lowest productivity in general, also least sensitive to transport costs, so has the “shallowest” bid-rent function (the least steep bid-rent function curve).
Value of land is dependent on transport and transport costs
The more costly the transport costs the steeper will be the bid-rent curve, hence describes the relationship between rent gradient and transportation costs.

Question 34

Consider two uses of a site. Use A is more sensitive to transportation costs, while use B is less profitable apart from transportation costs.
Which use is likely to prevail near a transportation node such as a highway intersection?

Answer 34

Suppose the most productive use of a particular site is as a manufacturing plant that will:
Generate revenues of $12,000,000 per year with;
Raw material costs and operating expenses (other than net rent) of $7,000,000 per year;
And construction costs (for the plant and equipment) that can be paid for with a perpetual loan with interest of $3,000,000 per year.
According to the residual theory, how much is this site worth in terms of annual land rent
see diagram