THE PRINCIPAL FACTORS AFFECTING THE SUPPLY AND DEMAND FOR LAND

AND BUILDING

Land is considered as a precious commodity. Even so, there are many factors that affect its
demand and supply including:

The income of prospective buyers affects the demand and supply of land. High income means
high purchasing power hence, increased demand for land and vice versa. High income also leads
to high supply especially if the price of land is favorable.

Availability of finance and cost also affect demand and supply of land. It is essential to note that
high interest rates reduce borrowing amounts that consumers can afford. This reduces the
demand for land. With high borrowing amount, the demand and supply of land also increases.

Population and more specifically the demographic features of a population including rate of
household formation, immigration, geographical distribution, age distribution and rate of natural
increase affect demand and supply of land. High population leads to increased demand for land.

Proximity also affects demand for land. Land that is close to social amenities including parks,
shops, sporting facilities, transport facilities and schools go for high prices because of high
demand. The demand and supply for land with close proximity to social amenities and
employment opportunities is high with increase in demand.

Rental opportunities-land that offers rental opportunities goes for a high price because of high
demand. Marketers raise the value of such a land beyond that which could be bought in an area
that does not provide rental opportunities.

The state of the economy also affects demand and supply of land. Land prices just like the price
of many commodities in the market are affected by the state of the economy. Therefore, there is
often increased demand for land in a stable economy as opposed to a poor economy. The state of
economy is also affected by other related factors including employment, wealth, affluence of the
population and income among others.

The surroundings affects demand and supply of land. The demand for land in good neighborhood
is always high. This leads to increase in price and supply of land. However, land situated close to
an airport or factory may be easily available but its demand is low because of the risks associated
with it.

Time affects supply of land. If land should be sold within a short span of time, its supply is
relatively fixed. However, as time goes by, there will be more flexibility in the supply of the
same land due to changes in price. This also increases the demand of land bearing in mind that
prices are adjusted to suit the needs of consumers.

Speculation also affects demand and supply of land. If the price of land is expected to go up, its
demand will increase. Consumers prefer to buy at lower prices and even sell the same land when
its value appreciates.
Allotment stocks are additionally one of the factors that affect demand of land. The rate at which
land is supplied is often determined by its demand. Therefore, supply of land depends on current
demand and stock of all vacant allotments as well as the motivation of the owner of such
allotment.

Factors Affecting Property Value

There are a number of influencing factors on property value. The impact of the influencing factor
will change depending on the severity of other factors.

Supply and Demand

Value is created by the interaction of supply and demand. Economic market principles determine
what value any commodity will have at a particular time. The supply of property is relatively
fixed at any one time. In order to increase supply, more properties must be built or large existing
properties split into several smaller units. Demand, however, can change relatively quickly thus
influencing property values. If demand increases and supply is fixed, the price of the commodity
will rise as more people try to buy. Increases in demand for property stimulate supply (the
builders of property) to create more, which takes time meaning prices will rise in the short term.
Demand may also be increased by changes in the economic situation of buyers: if they have
more income, demand is likely to be stimulated.

Location, Accessibility and Aspect

Location is generally accepted as the single biggest factor influencing market appraisal. Similar
types of properties in different areas command significantly different prices. Buyers may pay
more for a similar property in a more desirable area. It may be that accessibility to transport links
or good schools affects desirability. Aspect may include a view or a south-facing garden.

Property Type, Style and Age

Type of house (detached, terraced, semi-detached etc), style (e.g. does the house have a ‘wow’
factor or particular kerb appeal) and age, such as an older property with historical connections or
a newer property with up-to-date fittings, will also affect value.

Property Size

Linked to size of property is also area of land occupied which has an impact on value. Size may
be similar such as with a row of late nineteenth century terraced houses or may vary greatly so
knowing size is useful in the appraisal process. When measuring property, the guidelines in the
Code of Measuring Practice should be followed.
Planning / Building Regulations

Building a property today requires both planning permission (which covers size, shape, design
and siting aspects of the property) and building regulations (which covers the technical aspects
relating to the construction process) approval. Without these, a property may have to be
demolished. Occupancy restrictions are becoming increasingly common to ensure affordable
housing is available in certain areas e.g. the debate over the provision of affordable housing.

Other influencing factors include:

• Condition of repair inside and outside - some disrepair has more impact on value than others
e.g. a broken gutter can be easily repaired but cracked brickwork is more costly
• Method of construction - e.g. brick or stone walls with thermal block inner walls, pitched roofs
in tiles or slates or a prefabricated property popular at the end of the Second World War
• Ownership status – owning the freehold or leasehold is an important factor in value
• Environmental factors – susceptibility to flooding from severe storms as in early 2014 which can
be checked with the Environment Agency
• Energy performance and sustainability - in future, the energy performance of a property may
become an influencing factor on value and sustainability issues may impact on property value

Government regulations

If government regulations are inclined towards building/selling of houses then there is a net
increase in supply of houses and vice versa.

This would mean lower costs from the perspective of a builder/seller, which would result in more
building/selling of houses.
Principal governing the rate of Interest for different type of property

Banks follow the following principles of lending:

1. Liquidity:

Liquidity is an important principle of bank lending. Bank lend for short periods only because
they lend public money which can be withdrawn at any time by depositors. They, therefore,
advance loans on the security of such assets which are easily marketable and convertible into
cash at a short notice.

A bank chooses such securities in its investment portfolio which possess sufficient liquidity. It is
essential because if the bank needs cash to meet the urgent requirements of its customers, it
should be in a position to sell some of the securities at a very short notice without disturbing their
market prices much. There are certain securities such as central, state and local government
bonds which are easily saleable without affecting their market prices.

The shares and debentures of large industrial concerns also fall in this category. But the shares
and debentures of ordinary firms are not easily marketable without bringing down their market
prices. So the banks should make investments in government securities and shares and
debentures of reputed industrial houses.

2. Safety:

The safety of funds lent is another principle of lending. Safety means that the borrower should be
able to repay the loan and interest in time at regular intervals without default. The repayment of
the loan depends upon the nature of security, the character of the borrower, his capacity to repay
and his financial standing.

Like other investments, bank investments involve risk. But the degree of risk varies with the type
of security. Securities of the central government are safer than those of the state governments and
local bodies. And the securities of state government and local bodies are safer than those of the
industrial concerns. This is because the resources of the central government are much higher than
the state and local governments and of the latter higher than the industrial concerns.

In fact, the share and debentures of industrial concerns are tied to their earnings which may
fluctuate with the business activity in the country. The bank should also take into consideration
the debt repaying ability of the governments while investing in their securities. Political stability
and peace and security are the prerequisites for this.

It is very safe to invest in the securities of a government having large tax revenue and high
borrowing capacity. The same is the case with the securities of a rich municipality or local body
and state government of a prosperous region. So in making investments the bank should choose
securities, shares and debentures of such governments, local bodies and industrial concerns
which satisfy the principle of safety.
Thus from the bank’s viewpoint, the nature of security is the most important consideration while
giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower
which is governed by his character, capacity to repay, and his financial standing. Above all, the
safety of bank funds depends upon the technical feasibility and economic viability of the project
for which the loan is advanced.

3. Diversity:

In choosing its investment portfolio, a commercial bank should follow the principle of diversity.
It should not invest its surplus funds in a particular type of security but in different types of
securities. It should choose the shares and debentures of different types of industries situated in
different regions of the country. The same principle should be followed in the case of state
governments and local bodies. Diversification aims at minimising risk of the investment
portfolio of a bank.

The principle of diversity also applies to the advancing of loans to varied types of firms,
industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one
basket.” It should spread it risks by giving loans to various trades and industries in different parts
of the country.

4. Stability:

Another important principle of a bank’s investment policy should be to invest in those stocks and
securities which possess a high degree of stability in their prices. The bank cannot afford any
loss on the value of its securities. It should, therefore, invest it funds in the shares of reputed
companies where the possibility of decline in their prices is remote.

Government bonds and debentures of companies carry fixed rates of interest. Their value
changes with changes in the market rate of interest. But the bank is forced to liquidate a portion
of them to meet its requirements of cash in cash of financial crisis. Otherwise, they run to their
full term of 10 years or more and changes in the market rate of interest do not affect them much.
Thus bank investments in debentures and bonds are more stable than in the shares of companies.

5. Profitability:

This is the cardinal principle for making investment by a bank. It must earn sufficient profits. It
should, therefore, invest in such securities which was sure a fair and stable return on the funds
invested. The earning capacity of securities and shares depends upon the interest rate and the
dividend rate and the tax benefits they carry.

It is largely the government securities of the centre, state and local bodies that largely carry the
exemption of their interest from taxes. The bank should invest more in such securities rather than
in the shares of new companies which also carry tax exemption. This is because shares of new
companies are not safe investments.
In India as per income tax rule intrest upto Rs. 2,00,000.00 on housing loan can be deducted from
indivisual personal income, many people go for housing loan and property is mortguage in the name of
bank so housing loans are safe for bank. Due to above reason bank charge less intrest rate on housing
loan. Now a days in India for lower income group govt. is providing subsidary on housing loan. As the
housing loans are safe, the rate of intrest are low. As on commercial property there is no subsidary, loan
on commercial/ industrial properties are higher.
Valuation for Taxation purpose

The properties are valued for the purposes of deciding the tax liability in the event of gifting of
property or sale of property. In the case of gift of property either the person making gift or the
person receiving the gift is required to pay Gift Tax on the basis of value, within six months of
making the gift. In the case of sale of property, the seller is required to pay Capital Gain tax. Real
estate constitutes one of the important element of a person’s wealth. Whosoever owns property
beyond a certain limit must pay wealth tax on his entire property subject to some deductions such
as a self-occupied property.

Valuation for Acquisition:

Whenever a public body needs any piece of private owned property, it is notified for acquisition
as laid down in the Land Acquisition Act 1894. In such cases, the owner and / or interested
persons are paid compensation on the basis of market value prevailing on the date of notification.
A valuer prepares claim of compensation in which he value the land under acquisition as per
established norms.

Valuation for mortgage:

At times property owners offer their property as a security or collateral for loan obtained from
financial institutions. The amount of loan advanced against the security of property is recovered
by selling of property case the owner does not repay the loan as per agreed terms. While valuing
such properties the valuer is conscious of the fact that just as its value can appreciate due to
economic factors, it can also depreciate due to same reasons. Financial institutions advance loans
to the extent of about 75% of the present value of the property to cover possible accumulated
interest on the loan and depreciation in the market value.

Valuation on land and building basis:

This method of valuation is adopted only in cases where Rental Method cannot be adopted For
example, certain type of buildings like religious buildings and certain type of Industrial buildings
there is no rent or the basis of calculating estimated rent is unrealistic. Such a valuation may not
be comparable to the market value. This method is adopted for ascertaining the “Insured Value”
of building for the purpose of fire insurance. It involves calculation of cubical contents of the
building or buildings. Depending upon its nature of construction, its present cost of construction
is determined. The age of the building is determined on the basis of expected future life and not
on the basis of its actual physical age. By adopting sinking fund factor and depreciation factor
based on the age of building, amount of depreciation is calculated. Finally the depreciated cost of
construction is worked out by deducting the amount of depreciation from present cost of
construction. To this is added the present value of open land (area x unit rate) to arrive at the
valuation of property.
The income tax department used to adopt this method of valuation for valuation of self-occupied
residential properties, for taxation purpose. It is observed that there wasa lot of difference
between the valuation done on the rental method and that done on Land & Building method.
Now a days the income-tax department adopts a set formula which is more acceptable; and the
need for a valuer’s report has been eliminated.

Rental Method of Valuation

This method is also known as Income capitalization method. It is adopted in most cases. In this
method the basis of valuation is the Net Annual Return the property earns or is capable of
earning In the case of fully-rented property, the total rent collected from the tenants can be
ascertained from owner of the property. Similarly the statutory out-going such as property tax
etc. can be ascertained by obtaining copies of tax bills. As far as repairs and collection charges
are concerned, these are generally assumed at the rate of 5% and 6% respectively of the Gross
Annual Return. Fire insurance premium is adopted on the basis of actual premium. If the owner
has not insured his property against the risk of fire, a reasonable amount of premium is adopted
for deduction. If the fire premium is not deducted the owner gets advantage of marginally higher
value though he has neglected to do something which he ought to have done. Only in case of
Wealth tax the fire insurance premium is deducted only if the owner has in fact insured his
property against the risk of fire. The reason for this is that he gets advantage of lower valuation
and consequently pays less wealth tax.

After arriving at the net annual return, the expert ascertains the years Purchase factor based on
his estimate of expected future life and the return at an appropriate rate of interest. This
capitalization value of net annual return constitute the first part of valuation. The second part
relate to the Reversionary value of land. This value is also is also related to the expected future
life of the building. After ascertaining the present value of open land on the basis of comparable
sale instance, the value adopts a factor for calculating the reversionary value of land which is
based on an appropriate rate of interest and the expected future life. In the case lease-hold
properties, ground rent become one of the out-goings. There is no reversionary value in the case
of lease-hold land. As regards lands which are not fully developed or in other words whole FSI
or FAR has not been fully utilized, the value of land is done in two parts. The first part deals with
developed portion of land and the net income it earns. The reversionary value of the developed
portion is calculated as described above. The balance potential is treated as vacant land and value
as open land. It is immaterial weather the development can be made horizontally or vertically.