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Curtin University is a trademark of Curtin University of Technology
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Property Economics
Mid-Semester Review Instructions 2022
Dr Amity James
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Mid-Semester Review
Wednesday 6th April 2022
(Week 6)
15:00-16:30pm
Elizabeth Jolley Theatre
(Building 210 Floor 101)
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During the Review
 10 MC questions + 5 short answer questions
 Total 50 marks
 Covers material weeks 1 - 5 inclusive
 Time available: 70mins
 Deferred Assessment – submit an application for an
assessment extension
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Mid Semester Test – Revision checklist
 Real estate market characteristics
 Space and asset markets
 Determinants of demand
 Determinants and sources of supply
 Housing stocks and flows
 Property market cycles
 Macroeconomics
 Fiscal and monetary policy
 Functions of the real estate market
 Investment in real estate
 Capitalisation rates
 Investment Risk
 4Q Model (covered in Week 5)
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Multiple Choice Questions
 10 multiple choice questions, 1 mark per question
 Answer in the booklet provided
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Short Answer Questions
 5 Short answer questions (8 marks each)
 Use theory and illustrate with an example
 Think about what the question is asking
List
Describe
Explain
 Make sure you answer the question
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Example questions
Q1. Using Supply and demand diagrams describe the impact of a
rise in interest rates on a) the demand for owner occupied housing
and b) the demand for rental accommodation.
D
D1
Demand shifts as interest rates
mean fewer buyers can afford to
buy. Demand shifts from D to D1
and prices fall
D
D1
Move to renting houses so demand
shifts from D to D1 and rents rise.
Housing switches from the owner
occupier to rented market
S S
Owner Occupier Market Renting Market – inferior good
P
R
H RH
P1
R2
H1 RH2
Interest rates were used to control the booming property market from 2005-2008
before being cut in response to the economic crisis. Their effectiveness was
limited in the boom period due to the strength of demand.
Discuss a
little bit
Give an
example
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Q2. Describe 3 reasons why the commercial property market is
not a perfectly competitive market.
Real Estate Market differs from a perfect competition market in the
following ways (you would only need to describe 3 of these)
• Properties are heterogeneous and because no two properties are the
same they all have different values, unlike shares in a company which are
all identical. Demand changes can therefore affect properties very
differently.
• Low and irregular transaction volume meaning it is difficult to gather
consistent information on transactions to establish price. For some
commercial transactions there may be no comparable information
available.
• Less than rational consumers and producers. An tenant may pay above
the ‘market’ price in order to obtain a property in a specific location.
Developers tend to operate in herd like behaviour which can prevent profit
maximisation as competition forces up the price of land.
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Q3. Harvey and Jowsey describe 6 functions of the real estate
market. Describe 2 of these in detail.
The 6 functions are
• Allocate existing real estate resources and interests
• Indicate changes in demand for land resources
• Induce supply to adjust to changes in demand
• Indicate changes in the conditions upon which land resources can be suppled
• Induce demand to respond to changes in the conditions of supply
• Reward owners of land resources
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Q4. Illustrate how the elasticity of supply can have a dramatic
impact on property price changes following a shift in demand.
In the very short run (now) supply is fixed (Sm). In the short run supply can be altered through
refurbishment etc (Ss). Eventually supply can be increased by adding to fixed capital (new
development) (S1). if demand increases it has different impacts on price depending upon how
long the market has to respond.
D
Sm
P
Ss
D1
S1Pm
Ps
P1
If demand shifts then the greater the elasticity of supply then the smaller the impact on prices.
In the long run demand shifts have less of an impact on prices and the market can respond by
increasing supply.
To get full marks you would need to provide an example of a market where prices rose very quickly in
the short term due to a shift in demand and an inelastic supply curve e.g. Perth office market 2006-
2008 where demand increase significantly due to the resources sector but there was no new supply
coming on to the market so the vacancy rate plummeted and prices accelerated accordingly.
Developers were attracted into the sector by the potential profits so a supply response followed in the
short run.
Discuss a
little bit
Give an
example
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Q5. The real estate space market essentially consists of two
separate but interlinked markets. Describe these two markets
with reference to real estate demand and supply.
Property Market – property as space - demand for space
from occupiers – (tenants).
Capital market – property as an investment asset - supply
of space from landlords (investors)..
Explain how investors supply space which is consumed by
tenants. Use examples to explain.
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Q6. Explain the difference between an economic boom, a period
of steady growth, a recession and a depression.
Boom – Period of strong GDP growth e.g rising house prices, falling
unemployment, rising investment but rising inflation – rising AD
Steady growth – modest but sustained GDP growth e.g. modest rises
in house prices just above inflation, inflation stable or rising very
slowly, output slowly increasing, employment strong – slowly rising AD
Recession – two quarters of negative GDP growth e.g. rising
unemployment, falling house prices, falling output, cuts in interest
rates to stimulate demand, inflation falling
Depression – a year of negative GDP growth e.g. mass
unemployment, rapidly falling house prices, in drop in AD and a fall in
output, falling inflation.
Discuss a
little bit  Needs an
example 
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Q7. How do changes in interest rates affect aggregate demand?
Reduction in interest rates shift AD to the right because more disposable income,
reduce cost of borrowing etc increasing GDP but also prices.
Costs of Borrowing
Lower rates reduce cost of borrowing. Cheaper to obtain finance to purchase a house
or finance a development project. More investment and general spending as credit
cheaper. Increases AD
Cash Flow
Lower loan repayments so more disposable income increasing AD. Firms have more
money to invest in new premises for example. More cash to pay dividends
Asset Prices
Increase in asset (e.g. houses) prices due to an increase in demand and supply is
always slow to respond due to planning and construction lag. Increase in wealth due
to house price increase so more spending. Consumption and investment expenditure
increase
Exchange Rate
Depreciation in value of $ as Australia less attractive to invest in due to lower interest
rate return. Exports cheaper but imports more expensive
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Q8 Illustrate, using examples, the three types of
property investment risk.
1. Market Risk
Are risks that arise as the result of market changes. For example
an decrease in demand for resources would shift the demand for
office property to the left as businesses may reduce their
consumption of space and there is less competition for space.
This could result in an oversupply of property and vacancies
reducing rents, rental growth and returns. Capital growth would
also be affected. Demand slowed during the GFC in the Perth
office market reducing rents and therefore returns.
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2. Financial Risks
If an investor has borrowed funds to purchase property but interest rates
rise, the borrower may not be able to make repayments and may default
on the loan. This has financial implications for both the lender and
borrower. A rise in interest rates may also make it more expensive for a
borrower to renew loan finance and a development project may collapse.
This was evident during the GFC where there was a big rise in distressed
development assets.
3. Property Risks
Risk that affects an individual property and may arise from changes to
the locality, the building or tenants. For example, returns for local shops
are affected by the opening of a new shopping centre. Accelerated
depreciation due to technical changes may result in vacancies for
example poor environmental performance. A poor quality tenant may
default leaving a vacant property.
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To prepare:
 Go through all lecture notes on blackboard including the
supplementary material and workbook
 Listen to i-lectures
 Complete all readings
 Do additional reading to get real life examples eg
newspapers, office market reports
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Good luck!
