Tags

, , ,

Real estate agents talk about “location, location, location”.  When a seller evaluates a property, they look at recent sales nearby; it is certainly true that prices on the next street can be very different.  When a buyer evaluates a property, they consider the nearby amenities (e.g. parks and restaurants in the case of a residential property or transportation connections and nearby clients in the case of a commercial property).  So, unlike bread or cars which can be shipped somewhere else if desired, the value of a property is tied to its location.

The implications of immobility are also more profound.  Many government policies are based on location, such as taxes and zoning laws, even if people have an incentive to move.  Some people claim that the inability to create land (i.e. its supply is “perfectly inelastic”) makes land taxation the perfect source of government revenue.  (The supply curve is not quite perfectly inelastic since, as people in Toronto know, Front Street refers to the street which used to define Toronto’s waterfront. )

Business students are taught the importance of finding a competitive advantage.  In the real estate business, old school thinking was that a location’s advantage was determined by geography: e.g. Toronto’s natural harbour and nearby rivers inland made it a good choice.

Newer thinking understands that the source of an advantage is not necessarily fixed.  Silicon Valley is a successful source of ideas but there is nothing special about the location: moving everybody and everything 100 km. north or south would not make much difference.  The nature of the knowledge-based economy means that success attracts others and the creative environment which results helps everybody to succeed.

Students see some of this kind of idea when looking for the best bar in town (not that Guelph has any of them).  There may be good locations and bad locations but what attracts people to a bar (compared to the one next door) is that the best bar is where you can meet the best people.  Endogenous advantages exist but can change: once a bar loses its reputation of having the best, it is a self-fulfilling prediction that those people want to be somewhere else.  This effect of “agglomeration” helps to explain why people still go to the City of New Orleans to have a party; it explains why people work in that city even if, in terms of geography, it is a stupid place to live.

The same effects can also work in reverse.  Congestion is a problem which costs billions of dollars per year but not because of any technology or geographic feature: the reason why it takes me so much longer to drive to downtown is because so many other people want to do the same thing at the same time.

Understanding a location’s advantages is critical if you cannot move, but endogenous advantages are rarely discussed in other business classes.  They are a big feature of our classes and are another reason why studying the real estate industry is unlike any other university degree.

PA

Advertisements