Dynamic Residential Housing Cycles Analysis
The paper shows that there are factors which constitute the differences in locations and it includes localized materials, amenities and transport cost (Answers.com).
Von Then posits that transportation costs constitute or consumes Ricardo’s economic rent that’s why "because these transportation costs and, of course, economic rents, vary across goods, different land uses and use intensities will result in distance from the marketplace". In the table, we observed differences in rates across different locations. The theory suggests that part of this difference is accrued to the transportation cost. Real Estates including residential areas near the industrial and commercial districts are priced higher than those which are farther. This is explained by the differences in transportation cost as the former requiring minimal time, effort and financial costs in traveling. We expect that the commercial districts house the necessaries that consumers usually go to such as the office, schools, groceries, malls, shops, and others.
In this theory, the West End is obviously in the advantage against the City, making its rent prices higher. The difference in prices is necessary as can be explained by the simple law of supply and demand. If the rent prices are the same as the West End and the City, there will be a shortage of space in the West End resulting in overcrowding while none will stay in the City. In the presence of excess demand, the owners of the land will be able to increase the price, thereby creating a disparity between the West End and the City price. Simply put, the law of demand will work for the landowners, maintaining the price differences between the two locations.
Amenities are also better in the West End than the City. Being the center of industry and commerce, amenities will be located in the cities making it more attractive and nearer to a residence in the West End. This adds convenience to those who are in this place, thus it has to be compensated by a higher price.
Von Then also mentioned the difference in land use and intensity causing differences in prices (Wikimedia Foundation, Inc.). Since the land in the West end is mainly used for commercial purposes, where tenants expect a higher return than in the City, land prices can be increased. Von Then also mentioned the importance of centrality in pricing, saying that "it was the density of population increasing the profitability of commerce and providing for the division and specialization of labor that commanded higher municipal rents" (Wikimedia Foundation, Inc.)
The simple law of supply and demand can be used to explain cyclical patterns in rents. Both locations, the City and the West End show fluctuation in rental rates. Some empirical studies have identified reasons for this. We are going to study each factor and relate them to existing economic theories. It has been found that employment growth account for the fluctuations in the rental rate (Robert H. Edelstein). Accordingly, employment growth affects per capita income in a positive direction. With income being a determinant of demand, high employment growth will cause a high demand for housing and land. With the increased capacity to purchase, the overall demand for space will be increased thereby increasing the prices of houses, offices, and lands. This is observed at the time in 1973 and 1974, in 1987-1990, 2000-20001, and 2007-2008 in .the City and similarly in the West End. .