ARCHITECTURE

3.2.4
lative frenzies drive up asset prices to levels unjustified
by profit outlooks, as when the Japanese bubble
of the late 1980s caused “the few hundred acres of
land under the Emperor’s Palace in Tokyo . . . [to be]
worth as much as all the land in Canada or California.”
30 While bubbles can be “exhilarating” for financial
managers, they also pose “ethical challenges”
and legal hazards [See HH: 2011]. 31
The authors’ main theory of bubbles is that
artificial distortions cause the rational self-interest
of financial agents to diverge from that of the shareholders
they are supposed to represent. The global
financial crisis of 2007–09, for example, grew out
of such conflicts of interest: banks, investors, rating
agencies, government corporations, and consumers
all speculated as if there were no risk. The authors
attribute blame for this on the US government’s
backing of mortgage risks. This market intervention
distorted incentives and thus created an “agency
and incentive problem,” where different parties felt
they could safely “out-fool” each other in pursuit of
profits. 32 The second possible reason for bubbles is
the possibility that markets are not efficient. 33 An implication
of this view would be that we as financial
actors are, in the end, irrational.
Urban Economics and Real Estate Markets
(Englewood Cliffs, NJ: Prentice Hall, 1995), 378 pages, $112.80
Denise DiPasquale, President, City Research, formerly Visiting
Assistant Professor at John F. Kennedy School of Government,
Harvard; BA Carnegie Mellon; PhD MIT
William Wheaton, Professor of Economics, MIT; BA Princeton 1968;
PhD University of Pennsylvania 1972
Assigned at: MIT Center for Real Estate, UPenn Wharton
Read by Cezar Nicolescu
DiPasquale and Wheaton’s Urban Economics and
Real Estate Markets use mathematical formulas to
describe urban growth and programming. Beginning
with the question “What is real estate?” the first section
of their book models the relationship between
capital and real estate properties in terms of supply
and demand. The next two sections consider
anticipate
equilibrium
understand
land markets
to predict
value
land in terms of micro and macroeconomics. The
final section assesses questions of regulation and the
public good.
The authors make assumptions that land markets
are efficient due to the fact that tenants are mobile,
and that density reflects land value. At the same
time, changes in transportation technology drive
spatial changes by spurring industrial and residential
diffusion, followed by office and retail spaces.
The book’s “comparative static” equilibrium model
anchors its macroeconomic model in a description
of the real estate market as a web of four interlinked
supply-and-demand relationships. In the asset market,
rents and construction prices rise together, as
do construction prices and construction activity.
In the property market, construction activity and
building stock are also directly related; while rents
and building stock, on the other hand, vary inversely
(housing shortages mean higher rents). As the
economy expands, it exerts a centrifugal pressure
on this equilibrium, with all values increasing in
some measure. 34
Changes in a particular quadrant of the graph
will produce ripple effects. Lower interest rates,
risks, or taxes will cause investors to move funds
into real estate, rotating the rent-price (or asset valuation)
curve counter-clockwise, raising prices. This
will then increase construction activity and building
stock, lowering rents. Conversely, increasing interest
rates or adding onerous regulations will shift the
construction-price (or asset construction) curve left
so as to reduce construction activity, thus raising
prices and rents and lowering stock. 35
The authors explain land value in such disparate
urban areas as New York City, Phoenix, and Tokyo
in terms of a unified theory of land markets. In doing
so, they extend political economist David Ricardo’s
1817 model, which held that demand for land is
elastic and produces relative value, while supply is
inelastic and establishes overall value. This predicts
that land prices will increase closer to employment
centers. Furthermore, different residential groups
will segregate themselves naturally due to unique
158 159