PERFECT
MARKET
Perfect
competition requires as well as the above, that buyers and sellers
possess complete knowledge of the market.
THE
REAL ESTATE MARKET IS NOT PERFECT OR PURE COMPETITION
Real
estate markets differ from perfect and pure competitive markets in a
number of ways:
NO
OR LITTLE HOMOGENEITY
In
the real estate market, each parcel is unique and each building/land
parcel is different.
EXAMPLE
Residences
in a newly developed subdivision may be good but not perfect
substitutes for each other. Many parcels of industrial or commercial
property are poor substitutes for each other.
SMALL
NUMBERS OF BUYERS AND SELLERS
Most
real estate markets have only a few sellers and buyers in a
particular market at any point of time.
EXAMPLE
In
some rural districts, the only possible purchaser is to an adjoining
or immediate owner.
CONSTRAINTS
ON THE REAL ESTATE MARKET
Real
estate markets are affected by a variety of state, federal and local
government rules, standards and regulations.
EXAMPLE
Federal
Government policy can determine interest rates and the income tax
rate. This aspect is shown by the effect of negative gearing on the
value of suitable residential investment property.
EXAMPLE
Local/state
governments' acts, rules, standards and regulations on subdivision
and fire prevention and control. Such controls can create uncertainty
for example, the possible release of fringe area or green belt
(greenfields) land for residential use in the near future.
NOT
MOBILE
Real
estate is immobile as it cannot move to a place where it would fetch
the best price. This factor can cause economic obsolescence of
improvements for example, when a change in zone causes building
obsolescence.
The
demand for real property is generally affected by events in the
neighbourhood such as employment, social factors although the
property itself has not changed they have caused under or over
capitalization of the improvements.
IMPERFECT
KNOWLEDGE
Buyers
and sellers of real estate are often poorly informed. They buy or
sell infrequently and are not familiar with the marketing process for
example, auction procedures. However, this problem is mitigated by
the factors outlined in previous parts particularly, the role of the
agent acting as an informed middleman.
Although
not a perfect or pure market, the real estate market is competitive
so that the forces of competition are important in determining price.
Parcels of real estate although not identical, are often reasonable
substitutes and commonly, localities or suburbs can be substituted
for each other. Buyers of commercial and industrial real estate may
not be bound to one location and real estate developers and builders
may move from market to market in response to profit opportunities.
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