Buil1149 Property Economics

BUIL1149 PROPERTY ECONOMICS

INTRODUCTORY TUTORIAL PROBLEMS[†]

Q1

Explain the difference between a normative and positive statement. Which of the following statements are positive and which are normative?

(a) Mortgage rates and the level of property investment are inversely related.

(b) The practice of negative gearing of property investments should be abolished as it is widening the gap between the rich and the poor.

(d) The allowable depreciation allowances on business buildings ought to be increased as building owners are feeling the crunch.

(e) The vacancy levels in CBD office space have fallen to record lows.

Q2

Explain what is meant by the fallacy of composition and the ergo propter hoc fallacy. Which of the following assertions may be regarded as an example of the fallacy of composition and/or the ergo propter hoc fallacy.

(a) If people want their property to appreciate relatively to those in their neighbourhood they should do what I did to my house.

(b) The movement of people away from the city toward the quiet life of the seaside or country was primarily driven by the tremendous appeal of living away from the city as portrayed in two very popular TV serials: Sea Change and Always Greener.

(c) All industries in the nation may improve their profitability if they follow the example of the construction industry where real wages have been kept low.

(d) In the March quarter the housing mortgage rate was raised. In the June quarter the quarterly level of residential building applications increased. Hence, the level of residential building applications is positively related to the housing mortgage rate in the previous quarter.

Q3

Explain what is meant by the fallacy of division and which of the following assertions may be regarded as an example of it.

(a) Amex is a profitable residential construction company. Hence, one may expect that each and every one of its residential construction projects will be profitable.

(b) Just as a house owner must not borrow beyond his/her means, so too must it be the case for government and society overall.

(c) On this residential property I am certain that my prediction of the impending auction price will be out by no more than 1% because this is the average margin of error associated with the valuation technique that I propose to apply.

(d) Here is a good strategy for bidding at an auction: “Wait until the bidding is about to cease and the remaining bidders look as if they’ve reached their price limit”.

Define opportunity cost? For each of the following, consider the opportunity cost of the following choices:

(a) Pursuing a university degree

(b) Living away from home

(d) Going steady and/or deciding to have a family

(e) Not asking questions in class

(f) Choosing public transport for the university commute

Q5*

List the basic economic problems faced by all societies and briefly illustrate each of them by reference to society’s basic need for shelter.

Q6*

Paul who has recently graduated with a Bachelor of Applied Science (in Valuations) is considering whether it is worthwhile starting up his own real estate agency. His rich uncle has recently passed away and has bequeathed Paul the sum of $40,000 as well the premises of what used to be his uncle’s old real estate practice. If he runs the real estate business Paul will have to use all this money to pay for light and heating, telecommunications, company set-up costs, secretarial assistance etc. At the same time that Paul is considering running his own real estate agency, he has been offered an assistant valuer’s position with a starting salary of $35,000. Paul is fairly certain that the market is paying annual rent of $8000 for premises such as the one bequeathed to him. Moreover, were Paul to invest his $40,000 in a cash management account, he would earn 5% annual interest.

Required:

Under the assumption that working as an assistant valuer is the only other available option open to Paul over the coming year, determine the opportunity cost faced by Paul were he to run his own real estate business.

Q7

Consider the construction sector of Izlandia – a simple island economy that builds two types of buildings: – mud brick homes and mud brick temples. The economy’s production possibilities curve for the Construction Sector is reproduced below:

Required:

(a) What is meant by this production possibilities curve?

(b) Why is the production possibilities curve bow-shaped and under what special conditions would this curve be a downward sloping straight line.

(d) Use this curve to provide a diagrammatic interpretation of opportunity cost.

(e) Use the diagram to illustrate the consequences of population growth, technological advance and the discovery of new productive resources

(f) What is meant by the term under-employment of resources? Use the diagram to illustrate the consequences of such under-employment

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[†] Brief solutions to all asterisked questions on this exercise sheet will be posted on the learning hub within two weeks of the tutorial in which the sheet was covered in class. To ensure students attend classes regularly, their tutor will address all un-asterisked questions during class-time but no printed solutions will be made available.