Efficiency in housing production
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Real Estate Watch
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Chart 5.2.
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segments of relatively homogenous products, there must be abundant supply and demand and sufficient information for efficiencies to be generated in the market.
However, what is observed is that there are not many suppliers or demanders in the different segments of the local markets and, what is more, there is a certain shortage of important information. In this respect, following Evans (1995), there are three reasons why inefficiencies occur in the housing market: firstly, the differences in the location of supply; secondly, the considerable segmentation of the market; and, lastly, the existence of a set of characteristics peculiar to each home which makes it different from all the others.
Apart from the factors mentioned, the scant number of times a home generally changes hands and the limited occasions when there are numerous buyers and sellers for a set of houses mean that competition is limited and, consequently, it is difficult to make efficiency gains in the real estate market.
The existence of inefficiencies implies that, in the price-fixing process, the valuations of real estate assets are not as accurate as the valuations of other assets, such as those for assets traded in the equity markets. In fact, real estate valuations reflect more elements than those directly related to costs. And here resides part of the difficulty of modelling the behaviour of housing prices in the different markets.
b) The institutional view
The inefficiencies in the real estate market imply that there is the possibility of exploiting specific aspects of the real estate process that can generate extraordinary profits. In this respect, to better understand the nature of the inefficiencies mentioned2, the real estate market can be split into a three-level hierarchy. At the highest level would be the institutional framework, delimited by legal regulations and political, economic and social conventions. At the second level would be the real estate market as such, defined by its structure, its dimension and its protocols in the way it functions. At the third level would be the main agents operating in this market, such as consumers, financial institutions and real estate developers (chart
5.2).
From the above standpoint, efficiency becomes a relative concept that goes beyond technical restrictions or the availability of resources. In the case of the real estate market, the institutional approach changes the meaning of efficiency from what it is physically possible to make or build to the concept of what it is socially desirable to build. Thus, it could be technically possible to construct a certain type of building of a specific height, or efficiently develop a certain part of the city, but these opportunities might be limited by municipal uses, planning or the citizens' own desires.
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Keogh, G and D'Arcy, E (1999) Property Market Efficiency: An Institutional Economics Perspective, Urban Studies, Vol 32, Na13, pp.gg 2401-2414, 1999 .
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