Property Market Efficiency and Book Value

This assignment investigates the application of the efficient market theory within the context of property markets. It analyzes whether real-world property prices accurately reflect information found in financial statements, particularly focusing on the potential discrepancy between book value and actual market value. The assignment also considers the influence of economic factors such as interest rates and inflation on property price fluctuations.

Property Market Economic
analysis

Table of Contents
INTRODUCTION...........................................................................................................................1
1...................................................................................................................................................1
2...................................................................................................................................................2
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Real estate market is lucrative and good return yielding market. There are many
factors which can influence the demand and supply of investment. Present report will focus on
impacts of Market efficient theory on property market and it will analysis the whether this theory
applies in real estate or not.
1
Market is the place where firms trade its commodities to gain high profit. Property
market is the place in which people trade real estate properties, offered prices of these holdings
reflect supply and demand (Diewert and et.al, 2015). Market efficient theory or hypotheses
(EMH) is the concept which defines that all informations are available for all participants and
they can make their choice by using these detail substances. EMH theory works on assumptions
and rational, it is assumed that whenever supply increases then it affects the over all value of the
holding.
This theoretical concept applies in the real estate market in some cases. Real world
situation is differed from the book values and informations. Many investors analyse the
property's values and assume that it will increase in near future. Forecasting and valuation
techniques assist them in taking appropriate decisions. Real estates booms are very common in
the country, prices can get changed any time. US has suffered from housing bubble in 2004, the
main reason was of bursting that many of the banks have given housing loans to consumers by
assuming that properties values would get higher (Hoshino and Nakanishi, 2016). It was the
perception that continuously prices are increasing so it will remain same in future as well. But
suddenly stock market got dropped worldwide and prices of the properties decreased. U.S faced
the biggest financial crises issue in this year. So these informations will be as same as person
assume, it is not possible. Many factors may affect the value which can fluctuate the demand and
supply immediately. So there are no perfect informations are present which can define that prices
of properties will get down or increased. As banks and financial institution got failed in
assumption then common investor or property dealer can not determine that what will be future
price of real estate. EHS assists economists in explaining this cycle but it is difficult to predict.
Perfect competition does not exist in the market. Apart from demand and supple there are
many factors which influenced the price of the real estate (Morano, Tajani and Locurcio, 2015).
1

It is a hypothetical market where competition is at high level and also it is a market where many
sellers and buyers are present. Their decisions may influence the prices of the land and real estate
property. This EHS theory will not apply in this context because competition is vast term, prices
may get affected by many things like taxes, area of land etc. These can change any time but to
some extent these informations can guide investors and individual can assume the future price.
Decisions can not be taken by the investors easily, as there are entry barriers and exist barriers
which may influence its cost and value (Lai, Chau and Lorne, 2015.).
Rational actors in property market are stakeholders such as investors, customers, dealers
etc. Perception of individual, economic condition of the country etc. are some major factors
which can change their mind. So on the bases of EHS theory, these persons can not take their
decisions perfectly. EHS theory assists in assuming expected price of the land as per the
information available but modern financial economics will be differed from actual condition.
Book value is differed from actual cost because good will etc. some factors influence the price of
the property. So many time this concept gives unrealistic informations. This hypotheses just
strengthen the ability and predict market cycle but current understanding remains imprefact. So
EHS theory will not apply in this context (Paul and et. al, 2013).
Homogeneous decisions are another point on which this theory can not be applied.
Because if person is purchasing land for commercial purpose then individual will be able to pay
more but if person is taking it for accommodation then individual will not pay much price for the
same property. So Decisions may vary person to person. Thus, it will be difficult to identify the
real world situation by using book informations.
Price changed are common in property market but these values changes in intervals. EHS
concept perfectly apply in this context because demand and supply can easily identify with the
help of various previous graphs and one can estimate the future price of the property
(Economics Online, 2016). Though this will not be the exact cost but can be similar to this. So
economists can predict the cost of the land.
Risk is neutral because prices fluctuate in couple of time. It is difficult to estimate the
future condition nut some times these informations can help individual to predict the risks. So
RHS theory applies in this context but on some extent (Kanji, MacGregor and Tacoli, 2016).
2
For knowing the actual results, 20 investors have been asked these questiones.
2

1. Does Inflation affect the prices of properties?
Yes ◊
No ◊
Can't say ◊
From the above graph it can be concluded that inflation strongly affect the prices of
properties as if there is low currency value then people will not prefer to invest in properties so
demand will be low thus, real estate price will get higher. 17 investors are agreed on it, whereas,
only 2 are saying that inflation does not affect it.
2. Do you think high risk is involved into investment into properties?
Agree ◊
Strongly Agree ◊
Disagree ◊
Strongly Disagree ◊
Neutral ◊
3
Yes No Can't say
0
2
4
6
8
10
12
14
16
18
17
2 1
inflation affect the prices of properties
Column B

It can be concluded that high risks are attached with the property investment because
prices may get changed any time, the biggest example of it is U.S financial crises 2004. 11
investors are agreed on it, whereas 5 persons are strongly agreed in this point.
3. What is the level of contribution of real estate industry into growth of an economy?
High ◊
Adequate ◊
Neutral ◊
4
Agree Strongly Agree Disagree Strongly Disagree Neutral
0
2
4
6
8
10
12 11
5
2
1 1
High risk involve in property investment
Column B
High Adequate Neutral
0
2
4
6
8
10
12
12
5
3
Level of contribution in GDP
Column B

Property market highly contribute in growth of GDP. 12 investors are agreed on it. 5 said
that it adequate impacts on the GDP.
4. Do prevailing interest rate affects the prices of real estate?
Yes ◊
No ◊
Can't say ◊
15 investors said that yes interest rates affects the prices of properties because high rates
decreases demand whereas low rates increases demand so prices get fluctuated.
5. Do you think that property prices increase/decrease artificially in short-run?
Agree ◊
Strongly Agree ◊
Disagree ◊
Strongly disagree ◊
Neutral ◊
5
Yes No Can not say
0
5
10
15
15
3 2
Interest rate affects the prices of real estate
Column B

15 investors said that book value of property is differed from real scenario of world and
they are agreed that values increase and decrease artificially. Whereas, 2 investors strongly agree
on this point.
It is identified that results of interest rates and inflation are same. Both affects the prices
of properties to the great extend. It impacts on demand of investment (Crowe and et. al, 2013).
CONCLUSION
From the above it is concluded that efficient market theory applied in property market in
some cases but prices may get changed any time. On the bases of bookish informations'
prediction can not be done by investors.
6
Agree Strongly Agree Disagree Strongly Disagree Neutral
0
2
4
6
8
10
12
14
16 15
2
1 1 1
Property prices increase/decrease artificially in short-run
Column B

REFERENCES
Books and Journals
Crowe, C. and et. al., 2013. How to deal with real estate booms: Lessons from country
experiences. Journal of Financial Stability. 9(3). pp.300-319.
Diewert, E. and et.al., 2015. Parallel Sessions A: New Methods for Constructing Price Indexes
for Commercial and Residential Property.
Hoshino, T. and Nakanishi, H., 2016. Economic Valuation of Environmental Quality Using
Property Auction Data: A Structural Estimation Approach. Land Economics. 92(4). pp.703-
717.
Kanji, N., MacGregor, J. and Tacoli, C., 2016. Understanding market-based livelihoods in a
globalising world: combining approaches and methods. London, UK: International Institute
for the Environment and Development.
Lai, L. W., Chau, K. W. and Lorne, F. T., 2015. ‘Unclear’initial delineation of property
boundaries and the third Coase Theorem. Land Use Policy. 47. pp.273-281.
Morano, P., Tajani, F. and Locurcio, M., 2015. Land Use, Economic Welfare and Property
Values: An Analysis of the Interdependencies of the Real-Estate Market with Zonal and
Socio-Economic Variables in the Municipalities of Apulia Region (Italy). International
Journal of Agricultural and Environmental Information Systems (IJAEIS). 6(4). pp.16-39.
Paul and et. al., 2013. Economic and employment implications of a carbon market for industrial
plantation forestry. Land Use Policy. 30(1). pp.528-540.
Online
Economics Online, 2016. [Online]. Available through:
<http://www.economicsonline.co.uk/Business_economics/Perfect_competition.html>.
[Accessed on 17 October 2016].
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