Real Estate Investment International

This article discusses the law of demand and supply in the real estate market and how it impacts the equilibrium price of the property. It also talks about the profitable market for real estate investments and how the demand curve affects the market characteristics. The article further explains the Net Absorption method and its advantages over the Gross Absorption method. Lastly, it discusses the impact of changes in income level, credit availability, and cost of credit on the net absorption in the real estate industry.

REAL ESTATE
INVESTMENT
INTERNATIONAL

Table of Contents
QUESTION-1..................................................................................................................................4
a) Law of demand and law of supply in markets of real estate....................................................4
b) profitable market for real estate investments...........................................................................5
c) explanation of market characteristics on the basis of demand curve.......................................6
D).................................................................................................................................................7
e) Changes to the income level, credit availability, cost of credit, effect on the Net Absorption
......................................................................................................................................................8
F)..................................................................................................................................................9
a)................................................................................................................................................11
b)................................................................................................................................................12
c)................................................................................................................................................13
d)................................................................................................................................................15
e)................................................................................................................................................16
QUESTION-3................................................................................................................................17
A) Cycle of the real estate market based on stock flow model..................................................17
B) Degree of heterogeneity of tenants and degree of geographic dispersion of existing stock
affects the vacancy rate which is available in the market..........................................................18
C) Discussing the demand on the type and size of properties that an adult person creates to the
several stages of life...................................................................................................................19
D) Commenting on the upcoming increase of the interest rates from the European central bank
the third semester of 2022 and discussing how inflation impacts the interest rate and what are
the consequences on the real estate market................................................................................20
QUESTION-4................................................................................................................................21
A)...............................................................................................................................................21
B)................................................................................................................................................23
(c) Analysis of excess demand or excess supply of residential stock in the end of year 2024..24
(d)...............................................................................................................................................25
(e)...............................................................................................................................................27
(f)................................................................................................................................................28

REFERENCES..............................................................................................................................30

QUESTION-1
a) Law of demand and law of supply in markets of real estate
Law of demand refers to the process which states due to higher price buyer will demand
less. On the other hand law of demand depicts due to higher pricing, sellers would supply more.
In the context of real estate law of demand and supply reflect to the point which shows
equilibrium price of property. In significant term demand and supply work as one another in the
case until and unless the property equilibrium is reached (Ji, Marfatia and Gupta, 2018). The
lower supply might lead towards pricing which could be happen in bidding wars. Such conflict
issues ends when seller accept to offer and remove unit from supply availability. Although,
higher demand for properties in country aligned with lack of quality property supply. Whereby
price of house tend to hike accordingly. Apart from this weaker economy as well as oversupply
of properties direct towards decreased or no demand for housing in which price factors are tend
to fall at that point.
Real estate is the tangible asset which is made up of land and property, it is unmovable which is
also subject towards demand and supply. It can be said that price of houses as relevant to stocks
as well as bonds are dependent over law of demand and supply. It can be described effectively in
terms such as:
 Higher the demand, tend to rise high price
 More supply tend to decrease
Thus, real estate market is an appropriate example for the law and demand that also reflects to
how good these aspects can favour in relevant industry. The theory in this stage can termed as
one of the most basic principle in study of economics. Demand and supply is most significant
term that work against each other to reach up to the point at which equilibrium price is achieved.
In that case price remains equal for demand in market.
Moreover, there are some factors which impact real estate demand and supply. The fine value
attributed to demand and supply in marketplace is not easy aspect in terms of real estate markets.
It consumes more time for constructing new houses or for fixing up existing one to place into
market. In similar terms, real estate is very different from other industries which covers more
time for buying and selling procedures. The transactional activities will differ in such case and
would require time to consummate as such making real estate illiquid. Some factors immensely
influence housing demand consisted with lower borrowing cost and interest rates as well.

Whereas, if rate of interest is reduced, individual willingly access over debt as they can afford
such aspects on the basis of monthly outlay. Thus, it can be said that real estates markets are rely
over supply and demand through which it is seemed as preferable indicator in relevant industry.
b) profitable market for real estate investments
From the above diagram it has been figured out that P2 is the component in which price
of product increases which impact over decreased demand and increased supply aspects.
Furthermore, P1 indicates the price factor is higher which impact in increased demand and
shortage of supply. On the other hand, P* is the core point which denotes demand and supply are
equal which makes the perfect pair. It is known as equilibrium in which these two points
whereby demand for product equivalent with quantity supplied. It means there is no surplus as
well as shortage of good. Shortage appears in situations when demand surpass supply or when
price is in lower extent (Liow and Huang, 2018). For real estate investments P* level is accurate
which can provide profits for business to keep running on smooth basis. Supply and demand are
the relevant frameworks that can be utilized to justify and prediction of equilibrium quantity and
price of services being offered in housing market. The point over supply curve depict quantity
which suppliers fain to sell for specific price. On the other hand point on demanding curve
reflect quantity which individual is willing to buy at particular price. These interactions of
demand supply shows that equilibrium price as well quantity would prevail in marketplaces.
Moreover, in such competitive market supply and demand framework usually applied which
exhibits competition varying in two major conditions such as:
 Having two or more buyers and sellers who might be small relative to markets
 The product which is produced by sellers can be perfect substitutes.
In such competitive environment buyer and sellers access over given price as their actions does
not impact over price in industry. Thus, it can be concluded from the above graph that P*
indicates the equilibrium price which is the core point. It is beneficial to understand market work
criteria. Similarly, through such pricing methodology if price makes differentiation from
equilibrium pricing then it would imbalance among supply and demand which may provide
buyer and supplier with incentive to act differently. There is immense support for market
predictions as evidence from experimental marketplaces. This framework of supply and demand
support with relevant predictions regarding movement of pricing.

In the context of housing market business it can be stated on the basis of graph if both buyers and
sellers are inclined for exchange of quantity at price. At that single point demand and supply are
into balanced terms, the determination of price is highly depended on these factors.
c) explanation of market characteristics on the basis of demand curve
Demand curve in the context of economics is graphical representation of relationship
among price of product and quantity of product demand. From the graph it shows that elastic
demand is the one whereby changes in quantity demanded occurs due to change in price. On the
other hand inelastic demand refers to the process in which change for quantity demand appears
because of small change in price (Sadayuki, Harano and Yamazaki, 2019). Price is the most
essential factor in terms of identifying elasticity. It can be said that demand remains inelastic as
demand for product or service remains unchanged even if the price changes. The sensitive term
of price change are crucial while selecting markets for investments in real estate. For instance, in
market where real estate demand is sensitive in lower terms and more preferred with investment
point of view even the price rise in that case there would be decrease in demand. Thus,
sensitivity to real estate demand towards change in price is measured through price elasticity of
demand.
In the context of real estate business inelastic demand is more suitable as it does not
affect the demand in the cases when change in price takes place. The inelastic aspects drive the
purpose for business in better equipped terms towards profit maximization, also it is protected in
efficient terms for economic downturns. It is beneficial for the markets of real estates as price
factors increase but the consumer buying habits remains same which might provide various
benefit to business. The demand curve of perfectly inelastic goods are stated as vertical line
presented in graph as quantity demanded is similar with price changing factors. Also, supply is
also inelastic in that situation of unique product. It does not matter how customers are willing to
pay but there cannot be more than one primary version of it.
On the other hand elastic demand is riskier for real estate markets, these places includes
houses available for sale and numerous of buyer looking for one to purchase. While there are
some basic economic factors which impact to level of elasticity in housing markets. For instance,
if most of the people look further to buy home, the price will rise. While of these homes are
listed for sale which relates to amount of interested buyers in which price remains decreased.
Buying of house tend to have higher elasticity of demand. The elasticity is riskier for business as

loan interest rates and borrowing cost is in higher terms. Hence, it can be determined through
availability of substitute in particular market and segment. For instance, property having low
substitutes might have decreased elastic demand than segment having more substitutes. Hence,
investor should pay more interest towards project and markets with inelastic demand price as
price factor increase it would increase revenue as well (Joghee, Alzoubi and Dubey, 2020). It
would cause due to reduce in demand which would be not enough for eliminating gains from
increased price and rent as well. Moreover, if the price will goes up the quantity demand will fall
down but in that case revenue will be uplift due to decrease in Q is smaller than hike in P.
D)
In rental market it is seen that generally Net absorption method is being used. Since under
this method just supply and demand dynamics are taken into consideration. It is very essential
since if only one side is being undertaken then will impact the performance and quality of final
outcomes.
It can also be summarized as the difference between both commercial space which is
vacated in certain phase of time, by organizations, companies, tenants etc. this is highly useful
due to deeper insights it gives and paves the way forward (Jawad and et.al., 2018)
The gross absorption is also being used but due to some perilous notions it have, the
method is not given preference. It just measures the total square feet which are leased or
absorbed for sort of vacated space during a certain phase of time. This does not perceive both
dynamics but rely on a singe set of notions.
It would not be unfair to elaborate that it takes just one side of the picture into focus, total
space which is occupied, is definitely an important thing yet on the basis of the single set of
knowledge the entire decision can not be made. Just occupied area gives information about
possessions but the balance can not be deciphered which is salient thing for making decision
pertaining to rental market.
Keeping the shortcomings of the gross method the Net absorption method comes with
some advantageous points. It helps in installation of deeper understanding. The real estate market
is quite dynamic and in absence of both market supply and demand it is not handy to make
decisions (Kjeld and et.al., 2021)
It is supposed to be more handy and lucrative since it discloses to the investors that
should they make investment or not. It gives deeper insights of demand and supply. Weather the

demand is supposed to be higher or would be going down. These ideas pertaining to changes in
the occupied space offers greater understanding to the investor. This is the most significant
reason behind its preference when it comes to measurement of real estate.
The modern market of real estate is quit rigid and does not give that much resilience
while making decision. The extraneous forces are also impacting these decisions to the fullest
extent so in such predicaments an organization can not rely on just single side of a game, there is
inevitable need to perceive all the relevant areas in attempt to make rational decisions.
For example- If Net Absorption method is being used then-
Net absorption= Square feet which is physically occupied- Square feet which is physically
vacant during a certain period (Yadav and et.al., 2021)
By applying this formula the outcomes can be perceived and better judgement can be
driven. It may be negative or positive since the difference between occupied and vacant real
estate do not follow any pre intended trend. So it would be fair enough to decipher that net
absorption method is relatively better.
e) Changes to the income level, credit availability, cost of credit, effect on the Net Absorption
Changes in different economic factor creates issues and challenges for businesses in the
overall real estate industry in order to grow. These aspects are beneficial for fluctuating the
overall performance of the business in the industry.
Income Level
There is a significant influence on the income levels of the people due top increase in the
interest rates which is a difficult factor for the real estate businesses to face. There are changes in
the spending capacity of the people which has a major effect their overall sustainability in the
industry. The income decreases for the people which is not suitable for the retail industry to
prosper as more people will not be able to achieve a significant amount of success that has a
direct impact on the success of the business (Aalbers, 2019). Due to these aspects the business
may decrease their overall opportunities to grow and prosper.
Credit availability
Availability of the credit decreases in the real estate industry due to these factors which
has a significant influence on the overall performance of the companies in the business

environment. Due this factor people are not able to make an investment in fulfilling their
purchase decisions and but their desired properties and buildings. This is inappropriate for the
businesses to gain a better competitive advantage in the industry and increase their overall
success and development in the industry. These factors may lead towards the decrease in the
demand for the properties in the industry which is not suitable for enhancing the overall
sustainability of the business in the industry.
Cost of credit
The cost of borrowing money from the market increases due to an increase in the interest
in the real estate business. These aspects may have a negative influence on the overall
development of the company that are essential for enhancing the availability of the results. The
credit rates will significantly increases due to these problems which may not be crucial for the
companies to grow and achieve effectiveness in the overall business environment (Gopy-
Ramdhany and Seetanah, 2022). These changes in the interest rates are not suitable to manage
the rate of the credit which is a crucial element of the real estate industry. Disinterest of people
can be experienced due to these factors which is not suitable for the overall growth and
sustainability of the business in the industry.
Effect on Net Absorption
This initiates changes in the net absorption rates in the industry which have a major effect
on the overall performance of the business in the industry. These aspects are considered to be
effective that are crucial for the overall development of the company which plays a specific part
in the enhancement of the competitive business environment. These aspects are considered to be
creating difficulties for the business to manage their quality of output and gain benefit in the
business environment. Due to these aspects the business is able to perform specifically which has
a negative influence on the overall development of the industry.
F)
There are two instances are given, where the prices are changing with same rate. The
both areas are experiencing same surge in term of prices which is 10% but the locations are
different. Limassol is one of the most costly city, which is highly famous for its real estate prices
which are quite dynamic and it is next to the apex level of luxury.
The elasticity concept of real estate tells that if there is boost up in the prices of real estate
then to which extent it would impact the real estate demand. This relationship can not be cited

normal since the real estate sector is also hugely impacted by range of elements which decides its
prices and demand, supply etc (Kianfar, 2019)
Keeping the above raised notions in mind it can be articulated that both the locations
which are given in the case would not be having the same level or degree of elasticity. There will
be difference between them. The prices at lpsonas in Limassol and centre of Limassol are
changing with the same pace. But the final outcomes would be same.
As it is known that the central area of Limassol would be highly inelastic in nature. Since
it is located at centre of the city and having its great prominence for the people who are looking
to occupy land in any form. This form may be lease, ownership, rental etc. but the fact is very
much clear that if they are looking for the land then it would somehow increase the demand
factor and it would lead it be highly inelastic.
Relatively the lpsonas in Limassol would be less inelastic or may be elastic to certain
degree. Relatively the Lpsonas location would be elastic so if any changes are made in price it
will experience bigger decrease since the investors or potential customers would not like to
invest there due to the nature this property possesses (Gholizadeh‐Roshanagh and Zare, 2019)
At the same time, the property existing at centre of the city would be having its higher
importance which will lead it to be inelastic in nature. So if the prices are hiked then lpsonas in
Limassol would be experiencing biggest decrease in demand for the apartments.
This is happening due to elasticity factor since both the areas are not having their same
importance. And if it is tried to be perceived in simple term, then can be said that the location
which is having its more importance due to any reason, if experiences surge in price yet would
be having great demand. At the same time, relatively the location which is not that much
important will face relatively higher topple if prices are surged.
It can be deciphered that if the prices at Lpsonas in Limassol are higher and at the same time, the
prices of centre of Limassol are also higher with equal rate yet the decrease in demand of these
apartments would not be same. Elasticity of real estate will be leading to this notion and location
with greater importance would survive this jump in price with lesser impact on the demand.
QUESTION 2

a)
The term aggregate supply is also called sum total of output. In context of real estate
industry aggregate supply refers to the total number of properties that are available within the
economy in a given period at a given price. The aggregate supply can be represented with the
help of aggregate supply curve. Such a curve represents the number of properties on the x – axis
and their prices at the y – axis. There exists a positive relation between the price level and the
aggregate supply. In the real estate in a short run the aggregate supply changes with the change
in the price and the properties available. In short run the rate at which supply can change varies
from the rate at which the demand can change. There is slower rate at which supply can change
with respect to demand in the short run (Brinca, Duarte and Faria-e-Castro, 2021). Demand can
increase with various factors but the primary factor is the price. When the prices of the real estate
properties reduce then the market experience a boom in the total demand. In long run price levels
does not imply impact on aggregate supply. The only way by which the companies or firms of
the sector can increase their supply to earn more profits is through making improvements into the
quality of the properties that they provide. Increase in the level of skills, advancements in the
technology and increase in the capital investments.
A agregate supply curve is basically a way of representing the agregate supply
gregraphically. It shows show the price level and gross domestic product are correlated. First
considering the situation of short run the construction of new properties by the businesses is not

possible in context of both whether the properties are to be contructed for keeping them as rental
properties or contructed for the purpose of selling such properties. Only way to meet the demand
in the short run is thorugh lending the properties that becomes vacant or selling of them. But in
the long run there is no retriction regarding the factors of production that can be changed both
the variable and the fixed factors of production can be changed. The distinctinct of the various
production factors as the variable and fixed factors in the long run vanishes as all the factors
becomes the variable factors (Breza, Kaur and Krishnaswamy, 2019). In short run the factors that
are variable can be changed. The shift in the curve can be through an increase in the wages or the
raw materials. This will bring a shift to left. No fixed factors are there in context of long run.
There is enough funds available for the purpose of providing for the wages, etc. in addition to
this the factors like labor, capital, technology can also to changed. The LRAS cruve is static, and
the quantity that is supplied remains one only.
b)
Given stock flow equation = St = St-1 (1 – d) + Ct
Total Supply in 2020 = 12000
Total Supply in 2021 = 13500
Depreciation rate = 10%
Therefore, figure of 12000 i.e., total supply in 2020 is represented by St-1 whereas, figure
of 13500 is the total supply in 2021 which is represented by St. Also, a reasonable depreciation
rate assumed here is 10%. Thus, after putting these values in the above stock flow equation the
value of Ct comes to 2700. This figure of 2700 infers and shows the number of residential
properties built newly in 2021.
St = St-1 (1 – d) + Ct
13500 = 12000 (1-0.1) + Ct
Ct = 2700 residential properties.
Therefore, the above equation determines the total supply of residential properties in
2021 which is calculated by ascertaining total supply in 2020 and decreasing them with the rate
of depreciation and adding newly built residential properties within 2021 to it which came to
2700 properties from the above calculation. Thus, stock includes any quantity which can be
effectively measured at a specific point of time while flow defines the quantity which can be
effectively measured over a specified period of time.On the basis of this it can be articulated that

there is increase in the residential properties supply in the current year as compared to the
previous which is helpful in gaining the reliable insights about its prevailing situation. From the
evaluation it can be mentioned that the value of supply for residential properties depends on the
various situations. The main reason behind this is that the price is one of the crucial factor which
has influence on its supply as these both the factors tends to move in the similar direction as
positively connected (Nikiforou, Dimopoulos and Sivitanides, 2022). From the assessment it can
be mentioned that there are various form of the factor which is taken into the consideration in
turn attaining the objective of having higher value for the stock can be done. The presented
information is showing that how effectively its supply has been increased due to greater demand
in the market. The another reason for inclination of the supply of residential property is the
enhancing of the demand among the investors in turn good level of results is achieved by
property sector.
This permits to have the reliable information regarding the prevailing of demand in turn
attaining the good form of evaluation for the supply can be done. This form of the calculation it
can be mentioned that there is increase in the supply of residential property which shows that the
sector is performing effectively. The rise in the property supply for the residential use can be
articulated as increase in income of people. In addition to this, it is presenting the increase in
the consumption of particular kind of property in higher manner.
c)
On the basis of the above presented graph,sit can be articulated that there is inclining
trend in construction material index is seen. It shows that there is continuous increase in the
price of construction material which shows to be negative impact on real estate industry. In real
estate market, there are distinct types of the factors which tend to influence their pricing structure
so becomes essential on paying attention on its variation so that effective identification on impact
can be done. Inputs are the crucial elements which tend to influence the cost & profitability
structure of particular sector. In the determination of real estate, the emphasis is provided on
having the effective consideration of various factors which comprises raw material cots, location
of property, etc. in turn significant computation is done. The main reason behind the
identification of its impact is that it can give higher profitability by inclining its overall valuation
but the higher investment cost for customer can decline its demand in the market (Xu, and
Shi,2018). The fact behind its valuation in real estate is that it is reflecting rapid growth &

development in the market which shows that these can increase its demand in the market. On the
other side, construction material play pivotal role in project development. The constant incline in
the specified material can create the challenge for real estate as constructing on quality basis
and minimum risk does not become possible. It continuous fluctuation tend to create the higher
project market risk for the specified industry.
From the evaluation of the given graph it can be articulated that this is showing that there
is continuous increase its construction material cost which can negatively influence the real
estate due to the occurring of higher risk, etc (Construction cost index: Input prices for
materials, 2022). On the basis of this, it can be mentioned that there are decreases in the real
estate revenue from the year 2020 to 2022 as there is inclination of material cost in construction
industry. The particular index is showing the continuous level of increase in its prices of
materials that is reflecting the continuous barriers which can hamper the quality, increase in
risks, etc. this shows its continuous negative impact on the real estate.
On the basis of the evaluation, it can be said that there is continuous decrease in
profitability of real estate due to the inclination in its inputs. On the basis of this, it can be
articulated that there is significant emphasis should be provided on having the effective
implementation of the actions that can increase its demand in market. The constant increase in its
cost of materials which has adverse influence effect on real estate industry. On the basis of this it
can be articulated that this can negatively influence in case of continuous increase in turn
effective growth & development might not be attained by the firms in real estate sector.

d)
Vacancy rate is the term used in rental property context for referring to the percentage of
the sum total of units that are available. Units in the rental property for instance are hotel or
apartment that at a particular point of time are vacant. The concept is opposite to that of
occupancy rate. When the vacancy rates are low it is interpreted as the rental sales are strong on
the other hand a high vacancy rate denotes that the renting of properties is not well. Structural
Vacancy rate is referred to as that vacancy rate in which the market is in the equilibrium
condition (Tsai, 2021). The concept might contradict to one’s intuition as it can be interpreted
that any vacant property means excess in supply. But in real market situation it is verified
empirically that for maintaining of normal operations or equilibrium operations in real estate
market it is essential to have a vacancy rate that is minimum. The theory says that both the
processes that are a land owner searching for an appropriate tenant and the tenant searching for a
suitable vacant property take up long time and the processes cannot be initiated in the absence of
vacant property being available in the market for rental. A structural vacancy rate is thus a
minimum rate that is needed for the satisfaction of the needs of both such land owners and
tenants in the market. Further it should be noted that the vacancy rate can never be zero in any
condition. As above graph represents rent – vacancy adjustment with the curve R1 and the curve
V1 represents the structural vacancy rate. At the initial level the structural vacancy curve is at V
* meaning that the state of equilibrium after which there is a fall in the curve at an increasing
rate. At this particular point the land owners will increase the rents at an increasing level to there
is a rise seen in the R1 at an increasing rate (Morawski, 2022). After this the V1 curve reaches

the position where it is increasing below the equilibrium level but at this position the increase in
the rent will be at a decreasing rate. So the R1 curve is still experiencing a rise but the rate at
which it was initially rising has been experiencing a fall. This is the reason for the curvy shape in
the curve. So initially the rents were increasing at an increasing rate then the increase is at
diminishing rates and now the R1 will experience a fall. This is because of the change in the
structural vacancy rate, the rate is increasing at a level above the V *. At this point the land
owners are likely to reduce the rents at an increasing rate provided that the number of vacant
properties will increase because of the high prices being charged more and more people will
resist from taking them on rent (Nowak, 2020). And finally at the fourth phase the V1 will
decrease at a decreasing rate.
e)
Net migration or Inbound migration keeps the economy of the particular geographical
area robust and the levels of unemployment tends to be low even during the period of recession.
This net migration or inbound migration may be due to the place being safe to live in, place
being clean to live in, the economy being strong giving good returns and employment
opportunities, etc. This also includes the people who have chosen to stay in the particular
geographical location who otherwise would have moved to another place or country (Přívara,
2019). Naturally, increase in the inbound migration will increase the demand for the real estate
as the first and foremost amenity that a person looks for when moving to a different place is good
place to live along with such place being affordable. Therefore, this will increase the demand for
the real estate and resultantly, this may result in the rise in the property prices of such an area.
Up to a certain level of habitation, the city will be able to accommodate the proper
facilities matching the prices of the properties. But after this demand for real estate crosses a
certain limit, the prices start to increase and the facilities and amenities which were available at a
lower price earlier will not be available now at such lower prices and the prices will rise. This
will also affect the rental prices as the rentals will also increase simultaneously but the average
wages will not keep up with such rise in rentals and thus, will put pressure on the rental prices
and also on the individuals who are liable to pay these increased prices (Brown and et.al., 2021).
This inbound migration or immigration may also have certain negative impacts on the economy.
Such impacts include shifting and settlement of migrating households in the areas that are
smaller and of lower cost situated throughout the country. The main intention of these

households migrating or shifting to these locations is health & safety, availing the family care
assistance from the government and other organizations and the need to have larger areas for
living. Such larger spaces for households included access to large outdoor spaces with big
backyards, parks and balconies. This demand for large spaces to live in has also resulted in
lagging behind of demand for higher rentals for small apartments and studios and increased
demand for multi – space and multi – bedroom units.
As the demand for residential as well as commercial spaces have increased due to such
net migration, therefore, the supply for fulfilling such demand needs to be matched. Such a
mismatch of supply and demand will thus create pressure on the prices (Bakytbekov, 2019).
Such a demand is due to increased good job opportunities in the smaller cities in the sectors of
technology along with the vibrant lifestyle which attracts millennials who are mobile and well –
educated. This will result in the increased growth of residential rental and falling of the vacancy
rates of offices. The infrastructure too needs a significant upgrade as the rise in population will
also lead to rise in congestion on roads and public transport.
QUESTION-3
A) Cycle of the real estate market based on stock flow model
The real estate market which has been often known as the housing market cycle has been
determined as the model which represents the economic changes within the commercial and
residential real estate industries. The cycle in mainly made up of four parts which includes-
recovery, expansion, hyper supply and the recession. The real estate cycle has been determined
as the most important for the investors and researcher as this helps in taking major decision. The
stock flow model makes the distinction between the stock of the housing which is rigid under the
short run, flow of residential investment, react quicker towards the change in macroeconomic
condition. Thus, the real estate cycle and the stock flow model has bene linked together through
the two channels.
Stock flow model diagrams are the ways which helps in representing the structure of the
system within showing more detailed information as compare to showing the casual loop
diagram. Stocks are the fundamental element in order to generate the behaviour in a system and
the flow causes stocks to change (Li, Kou and Wang, 2019). The fluctuation in the durable goods
such as- housing are typically estimated with the stock flow model. Thus, the stock flow model
develops distinction between stock of the housing which is highly rigid in short run. The flow of

the residential investment reacts quicker to create changes in the macroeconomic condition.
Thus, real estate cycle and the stock flow framework is linked together with the two channels.
The rate of expanding stock is depending on the expansion of residential investment along with
depreciation rate.
The real estate cycle and stock flow diagram is also linked due to the housing prices.
Housing prices in real estate is decides on the basis of the housing stock. This creates the strong
influence over the residential investment. The housing market research is done on the basis of the
stock flow approach. The space demand, rents, vacancy rate, stock available and the completion
are the major elements of the stock flow model with the vacancy in housing stock. Any change in
demand, vacancy and rate in the stock flow influence the real estate cycle as the decision in real
estate cycle in context of housing stock have been taken on the basis of the demand of property
shown in the stock flow model.
In stock flow model, the housing prices have been determined on the basis of the existing
housing stock. The equilibrium price of the housing stock is also determined on the basis of
existing stock. Stock flow model is appropriate in short run as the fluctuation and dynamic in the
housing prices can be measured with the help of stock flow model in short run. However, in long
run this has not been considered as appropriate (Bleyl and et.al., 2019). With the help of demand-
shifting variable stock flow model determines the standard fluctuation in housing rate and
housing stock and on the basis of that real estate cycle has been measured.
B) Degree of heterogeneity of tenants and degree of geographic dispersion of existing stock
affects the vacancy rate which is available in the market
Housing heterogeneity is the new concept in real estate. It is related to price differences of
the outwardly similar house units. Thus, heterogeneity of the real estate property implies that,
every unit is unique in context of construction, financing, condition and mainly on the basis of
location. Hence, it implies that assessing the value is necessarily difficult. High amount of
uniformity in the houses creates the rate of heterogeneity for tenants which impacts the vacancy
rate available in the market.
Investors seeks for house who is available at best location and has effective construction
and designs. There are numerous properties available in the market. However, investors take
decision on the basis of the degree of heterogeneity as it shows uniformity in the property and
therefore, it impacts vacancy rate that are available in the market (Cohen, 2022). Thus, degree of

heterogeneity of tenants creates fluctuation in the pricing of the property and this further impacts
vacancy rate that is available in the market. When the degree of heterogeneity of tenants is high
then, it depicts that there is high degree of uniformity in the houses. As a result, the vacancy rate
gets impacted as investors invest in the property and vacancy rate has been reduced. Thus,
degree of heterogeneity of tenants reduced the vacancy rate in the market in relation of the
property available in the market.
The geographic dispersion means that the locations or the areas which are providing the
greater opportunities to the families in context of education, transportation, health, mobility,
neighbourhood quality and environment. Thus, higher degree of geographic dispersion states
that, property is located at the effective area from where people can access all kind of services
along with the neighbourhood quality. The geographic dispersion of the existing stock in real
estate impacts the vacancy rate that is available in the market. The vacancy rate of the property
has been reduced in the market within increasing the degree of geographic dispersion of the
existing stock in the market.
The number of units that are available on the rental basis and which are unoccupied in the
building, complex, colony and hotel for a particular given period of time. This is the vacancy rate
which is generally opposite to the occupancy rate. Therefore, the degree of geographic dispersion
of existing stock creates higher impact on the vacancy rate available in the market. It is important
that vacancy rate must be reduced so, the business in real estate can be done in effective terms.
The vacancy rate in the market can be reduced with the higher degree of geographical dispersion
of existing stock (Li, Liu and Qi, 2019). As the property is located at the effective location which
is in high demand by the customers. Therefore, the vacancy rate is reduced in the market as the
property is being approached by the investors dues to its availability at effective locations.
C) Discussing the demand on the type and size of properties that an adult person creates to the
several stages of life
The different stages in a person life creates the demand in regards to the type and size of
the property. There are certain factors that are aligned with the demand of the person in relation
of properties at the different stage and which are location in which the property is available. An
adult person seeks for the perfect location in the property and the size of the property must be
bigger and located at the areas from where the mandatory facilities can be easily accessible.
Therefore, it is important that property must be available at the such location.

The other demand can be varied within analysing the demographic element of an adult
person. For example- A person has effective income and effective financial ability then, the
person seeks for costly property that which provides numerous benefits. On the other hand,
person who has lack income seeks for the property that is has lower prices (Li and et.al., 2021).
Thus, demographic elements impacts the demand of adult person in regards to size and type of
property. At the initial stage level, adult person seeks for the property which can be available to
them at rent and therefore, at this stage demand of the rental property is high. Thus, in this
manner at this stage demand of the rental property is high. On the other, when an adult person
start family at that time, demand of those properties can be increased which are available in the
apartments or building so, the person can live with the family.
Thus, the demand of the adult person keeps changing in the several stages of life in regards
to buying the property. At starting small property is in high demand by the person and
afterwards, the demand of large house has been developed. However, demographic factors
makes higher impact on the demand of the size and type of properties. An adult person starts
demand from buying individual property and then demand gets changed within buying the large
property. At initial stage the heterogeneity of the degree is being prioritised by the person. It
means the design and construction ways of the property has been given the importance.
However, after sometime geographic dispersion is being prioritised by an adult person (Faller
and et.al., 2019). This implies that adult person demands for that property which is located at
specific place and from where all the facilities such as- educational, health, transportation and so
on can be easily assessed. So, it can become easy to experience the benefits of all the facilities
that are highly important for the people.
D) Commenting on the upcoming increase of the interest rates from the European central bank
the third semester of 2022 and discussing how inflation impacts the interest rate and what
are the consequences on the real estate market
The increase in the interest rates from the European central bank has a significant influence on
the overall performance of the business in the industry. There are different aspects which may
create changes in the operational capabilities of the businesses. The increase in interest rates is
responsible for increasing the overall cost of borrowing which is necessary for the businesses to
manage their stability in the business environment. This has a major impact on the real estate
businesses as their effectiveness in the may decreases due to these factors. The reports from the

third semester of 2022 indicates that these fluctuations have shown that the businesses have been
affected due to the changes that are made in the interest rates. Due to these changes the
businesses in the real estate industry may face challenges and issues to maintain their success in
the industry.
The fluctuations of these aspects are considered to be difficult for the businesses that are
operating as it creates a negative impact ion the overall performance of the companies in real
estate industry. Changes in these factors are considered to be inappropriate as the stability of the
business environment is compromised which leads towards differences in the growth of the
businesses. It is not suitable for the companies to grow and generate better profitability which is
necessary for the companies to grow and development of the business environment. Due to these
factors which is beneficial for increasing the overall performance of the industry. With the help
of these changes the businesses are able to experience a significant fluctuation in their overall
capability to grow and enhance their sustainability in the business environment.
Decrease in the demand for the properties is a major consequence of the increase in the
interest rates which is not suitable for achieving better effectiveness in the market suitably. The
changes in the interest rates are major which are not suitable for the operators which have a
significant place in the business environment. Due to several changes in the business
environment the organizations are unable to grow and achieve sustainability. The problem of big
overheads can be a major issues which creates differences for the businesses to achieve a better
quality of output which have been desired by them in the industry. It has a major influence on the
overall success of the organizations to manage their performance.
QUESTION-4
A)
Over the time, it has been experienced that the social factors are having their great impact
on the demand of residential properties. Since the residential properties are less likely to be
perceived by investors and a vast majority of such households show their interest due to the
inevitable usefulness of the property.
There are number of social dynamics, which can also be cited as kind of demographic
dynamics. These factors have their significant role in relation to determination of total supply of
residential properties (Martin and et.al., 2019) There are different types of social factors which

may impact the prices of real estate. For instance- the size of a nation, population of a nation,
changing age proportion, marriage rate, sex ratio, population with education etc.
1) Marriage rates-
Marriage is one of the most common social phenomenon and if the marriage rate is
getting up then somehow people would get driven to buy their own house. If there is high
demand of residential houses then will somehow would lead to higher prices of property. People
would ask for more residential houses and it will be hiking prices. At the same time, if after
marriage the social indicators show that couples are more likely to desire their own house.
Higher the marriage rate will lead to need of separate house. In the wake of such culture
the social dynamics pay great role in hiking the prices of properties. As it is seen that in the
nation the demographic dynamics are changing with the progress of time. The fact can not be
rejected that if the marriage rate is going upwards would be reflecting higher need of residents
(Vorland and et.al., 2018)
On the other hands, higher marriage rate also signifies higher rate of birth. If people are
getting married then will be obliged by some social factors to be engaged in the process of
reproduction it would hike overall population and will be ended up with higher requirement of
residential houses.
2) Divorce rate-
Divorce rate can be defined as the proportion of such married women or man out of a
predetermined figure who give divorce to their partner. It is so often to see in the nation that if
people are getting departed then they are supposed to be self depended. The notion self
dependency only comes if they have their house.
Moreover, if divorce rates are going higher than it may also have the same repercussions.
Since with the divorce there will be separation of families. At once a family is separated then
there is high possibility that both male and female would look up for sort of new house. It will be
surging the needs and would be paving the way for hyper residential house prices.
In number, it is fair to decipher that in the almost same proportion of commutative
marriage rate and divorce rate the need of houses will go upward. And in term of property type
so in this case, such houses which are smaller in size and are intended for least number of people
will be getting priority. Other forms of properties such as piece of land, houses, apartments will
be in demand.

B)
The stock of resale units is highly sensitive to both income level of population and prices
to new build properties. Since these factors are having their great impact on the pricing of resale
units. Resale unit is the form of property which is owned by some person and is being sold to
other.
1) Population income level-
If income level of population goes higher, then there may be some impacts on the stock
of resale units. There are two main types of impacts can be expected. Firstly, the people with
higher income would not like to buy resale units so it will lead to hike in the stock. At the same
time, people with higher income who desire to have their house may go for resale units and it
will topple the stock (Baes, Camps and Matsumoto, 2022)
The fact can not be rejected that the higher income raises the demand factor. Both are
having kind of positive relationship. If the income level is taking rise then will be leading to
more spending on such avenues of investment. So altogether the stock of resale units will get
affected by the changes come in income of households.
2) Prices to new build properties-
There is again negative relationship between the prices of new build properties and stock
of resale units. It a general phenomenon that majority of people do like new build properties
rather than resale units. They are more inclined to make buy of such new properties than such old
or resale units (Rathod and et.al., 2021)
On the basis of the above information it could be deciphered that if prices of new built
house come down then ultimately the stock of resale unit will go up, due to fewer prices more
constellations will get driven to buy new house rather than old. It will reduce the sale of resale
properties and as ultimate outcome the stock is to be hiked.
Contrary of the above notion, the prices of new built house go up then as ultimate
repercussion the people will be more likely to buy new house rather than old one. Where it
becomes simpler to decipher that the stock will get affected in adverse direction (Lange, Thiele,
D. and Kuijpers, 2022)
Form the above analysis it can be summarized that the role of both hiking in prices and
population income level have their drastic implications on the prices of properties. There is great
relationship due to prevalence of economic concept of demand and supply.

(c) Analysis of excess demand or excess supply of residential stock in the end of year 2024
Calculation of total number of households or total aggregate demand of the year 2022 and 2024
Formula =
HH(T+N) = POP(T+N) / HS(T+N)
2022 = 250000 / 2.67
Total aggregate demand (2022) = 93633 approx.
2024 = 268850 / 2.67
Total aggregate demand (2024) = 100693 approx.
Calculation of total aggregate supply in the year 2024
Formula =
TAS(T+N) = [S(T) * (1-d) + C] * (1-V)
= [104350 * (1 - 0.05) + 865 (1 – 0.05)2 + 822 (1 – 0.05)] * (1 – 0.03)
= [99132.5 + 843.0977 + 780.9] * 0.97
= 97733.80
Assumptions:
It is assumed that the reasonable structural vacancy rate of residential stock is 3% and reasonable
rate of depreciation of residential stock is 5% because of the lack of information in the question.
Comment:
On the basis of above calculation, it is identified that the total demand of residential stocks
in the year 2024 is 100693. While on the other hand, the total aggregate supply of household is
97733.80 which is lower than the demand. Hence, it can be said that at the end of year 2024,
there will be excess demand in the specific Limassol city. The excess demand is the quantity
demanded at a given price higher than the quantity supplied. If the quantity demand of the
number of households is higher than the quantity supplied of the number of household, then it is
known as excess demand (Mandel and Veetil, 2020). However, on the other hand, if the quantity
supplied is higher than the quantity demanded is known as excess supplied.
In this market, the rents are expected to change based on the demand and supply of
residential property in the market. If the supply is lower than demand, then price will fall. While,

if the demand is higher than supply, then price will rise. For example, in the present question, the
demand of residential stock (100693) is higher than the supply of the residential stock
(97733.80). Hence, the price i.e., rents of the residential property are expected to rise in the
Limassol city (Razo-De-Anda, Cruz-Aké and Venegas-Martínez, 2022).
Based on the above assessment, it is identified that this is a good period of time for the
investors to invest in the residential stock of the city. It is because the demand of residential
stock or residential property in the Limassol city is higher. If the investors will invest in the
residential stock in the present period than they able to get higher return in the form of high
rents. It is because the rents of residential property have increase due to lack of supply in the
residential property.
The demand and supply are both most significant factor which affects the price of the goods
and services (Fan and Zhou, 2019). The same concept applied to real estate sector. In real sector,
to estimate the price of the residential property, the supplier need to analyse whether there is
excess demand or excess supply within the specific city. This also helps the people to decide
whether to invest in real sector or not.
(d)
Cash accounting method is also known as the simple accounting method. It is specifically used
by small business organizations and it includes only the transactions associated with the cash
only. In this accounting method, a cash transaction is recorded only when the cash is received or
paid within the company. It is true that the simple accounting method or the cash accounting
method only presents a rough estimation of the rent. In the present report, aggregate demand and
aggregate supply has been calculated. On comparing the aggregate demand and aggregate
supply, it has been identified that the supply is higher than the demand in the market. This leads
to a fall in the price of the real estate in the market which in turn creates a good opportunity for
investment for the investors. This is because, the investors can purchase real estate at really low
prices because of the decrease in demand and use the properties for rental purpose only. This will
help the investors in enhancing their profitability in the near future.
The cash accounting method does not record transactions which takes place on the
accrual basis. This affects the overall estimations of the transactions that has took place in a
company on an annual basis, therefore, the business organizations make use of econometric
methods in order to make more precise estimations associated with the business transactions of

the company (Tkachuk, 2019). The disadvantages of using a simple accounting methods includes
the following:
 It has been determined that the use of simple accounting method or the cash accounting
method does not present a clear picture of the financial status of the company. This
method is unable to present the liabilities of the company, this in turn may lead to faulty
representation of the financial position of the organization. Because of the unavailability
of the clear picture of the financial status, an organization might get mislead and might
think they have more money while actually they will not be having that amount of money
with them.
 Another major disadvantage of cash accounting or the simple accounting method is that it
cannot be used by each and every organization (Modugno, and Di Carlo, 2019). Since, it
does not present a clear picture of the financial statements of the company, not all the
companies can implement the use of simple accounting method in order to record their
financial statements. It has been determined that the companies which sells their products
and services on credit cannot make use of this accounting method. Along with this, the
organizations whose gross receipts are higher than the IFRS requirements and requires
inventory for the purpose of recording the income, cannot make use of this method of
accounting for the purpose of recording the financial transactions of the organization.
 Lastly, it has also been determined that the companies who choose the cash or simple
accounting method finds it difficult to switch to another method of accounting in the
future. All of these drawbacks leads an organization to make use of econometric methods
instead of simple accounting methods.
The econometrics method is a statistical method which is opposite of simple accounting
method because it uses statistic tools and techniques to estimate the future rent of the residential
property. This is used to test the existing hypothesis in economics as well as finance where
appropriate alternative and null hypothesis is formed and will be test using the regression model.
Using econometric method, to estimate the rent of the residential and investment property
became easier and more reliable as compared to using simple accounting method. It is because
econometric method is best to forecast future economic and financial trends. One of the greatest
advantage of econometric method is that this models are indirectly related to the forecasting and

estimating future result (Qi, 2020). With the help of this method, the real estate industry or
property supplier can predict the direction as well as the extent to which changes have been
occurred in the overall project. After analysing those changes, the property supplier can make
changes to their development projects. Another most significant advantage of using econometric
method is that it helps to forecast the variables such as rents without worrying about the
theoretical interrelationship between the related variables.
This method will allow the property supplier of real estate industry to establish the trend
between the dataset. For example, using this method, the supplier can easily frame a relation or
association between the demand, supply and rent of the residential property. This method helps
them to analyse whether the demand of households have positive or negative relation with the
rent of the property.
(e)
Calculation of competitive position index:
Competitor 1 position index = Competitor property price / Subject property price
= 2986 / 3260
= .92
Competitors 2 position index = Competitor property price / Subject property price
= 3108 / 3260
= .95
Competitive position index = (.92 + .95) / 2
= .94
The above result indicates that the position of competitors as compared to position of
subject property in the market is lower. It is because, the price of competitor’s property is .06
time lower than the price of subject property. This further means that the demand of subject
property in the market will fall as the price is high as compared to competitor’s price (Akinsomi,
Mkhabela and Taderera, 2018). The value of competitors 1 position index (.92) indicate that the
when the subject property price is 1 than the competitor will set price of its property is .92 i.e.,
lower than .06. On the other hand, the competitors 2 position index indicate that the price of
property of competitors is .95 which is .5 time less than the price of subject property.

(f)
Number of units in the project = 180 units
Number of competing units in market = 1500 units
Competitive position index = 1.09
Estimated market demand for the type of units in the project = 1300 units
Calculation of fair market share:
Fair Market Share = Number of units in the project / Number of all competing units in the market
= 180 / 1500
= 0.12
Calculation of Project Absorption:
Project Absorption = Fair market share * Competitive position index * Market demand
= 0.12 * 1.09 * 1300 units
= 170.04
In real estate sector, the fair market shares or value is the price of the assets or residential
property when both the buyer as well as seller have the reasonable knowledge of it. Also, they
are willing to deal in residential properties without any pressure. The fair market shares the share
of the units in the specific real estate project as compare to the number of competing units in the
overall market. On the basis of the above result, it is identified that the market shares of the
present project as compared to market project is 12%. It is because the number of units in the
present project is only 180 while the number of competing units in the market is 1500 units. The
fair market share of the project is useful in the calculation of project absorption (Wu and Zhu,
2021).
Project absorption is commonly used in the real estate industry which state the number of
units of property sell in an area over a period of time. To compute the project absorption, the
firm market share, competitive market indices and estimated market demand has been used. On
the basis of calculation result, it is identified that number of units that project will absorb or sell
over the period of time is 170.04 units out of the total number of units in the project of 180 units.
This indicate the good performance of the project because majority of the units of the project will

easily sold in the market. It is because the estimated demand of the type of units covered under
this project is high.
Project absorption technique is one of the best technique in the real estate sector to
analyse the portion of units in the project will be easily sold in the market. With the help of
project absorption, the supplier and customer both are able to understand real estate. It is also
important for assessing the rate of return of an investment in the development project (Lim and
Ng, 2022). For example, in the present question, the cost that real estate company have incur for
producing 180 units of development should be lower than the revenue they expect in return. So,
with the help of project absorption calculation, it is identified that out of 180 units, the revenue
of 170 units will be easily recovered from the project.

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