Urban Real Estate Economics And Juxtaposes Them With Traditional Theories

2887 Words Nov 27th, 2014 12 Pages
THEORETICAL BACKGROUND

This paper discusses and analyses modern theories of urban real estate economics and juxtaposes them with traditional theories. In earlier times, city life used to revolve around a central business district (CBD) which was the nerve centre of all economic, social and cultural activity. As a result, real estate prices reflected the proximity of the site to the CBD and they dropped the further one went from it. The dichotomy is often expressed through architecture, with high-rise apartment buildings in the city and low-rise developments further out. Alonso, 1964; Mills, 1972 and Muth, 1969 mulled on this model of cities and viewed real estate economic data and ran studies through the lens of a monocentric urban
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Applying this theory to urban real estate, a monocentric city would have finite space for development due to which costs of construction will rise, passing on the burden to the buyer.
Von Thunen, on the other hand, concerned himself with location and transportation costs in addition to fertility as factors determining price. He attributed differential rents to distances between places with desirable qualities and the costs of transporting oneself between them. At its most basic, the theory stands for the hypothesis that without the need for proximity and the price (rent) charged for it, land would be an almost free good.
For two residential locations to have near identical prices, not only must they be located close to each other, but they must also provide the same level of utility to residents. This is because the decisions of location and consumption levels can be replicated by others. A rise in the costs (monetary and other) of commuting as a function of distance from the CBD can be offset by declining prices the further the residential development is from the city and its CBD. In addition, as one lives further from the CBD, the consumption levels rise as the lower rental prices can now be used as disposal income for pure consumption. The density of structures also drops with distance from the CBD. This has resulted in a concentric zone model, with the cheapest real estate on the outer rings and the most expensive land,

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