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AP Financial Management 2012/14 - Global
Economics
Exercises for Chapter 8. The housing market
Exercise 1
Below is a representation of the demand curve for single-family houses in the Danish town of Aalborg.
Property price (DKK)
D0
Quantity (number of houses)
1. Explain the impact of the following events on demand:
a. An increase in income levels.
b. A reduction of interest rates.
Exercise 2
In southern Jutland, many new homes were built in the period between 2003 and 2008, and towns such as
Haderslev and Aabenraa saw the development of new residential areas.
1. Offer possible explanations for the large growth in residential construction in Haderslev and
Aabenraa.
In cities and larger towns and in the Copenhagen area, the housing stock could not be expanded as much as
in the smaller towns.
2. Offer your assessment of the price development in the cities and larger towns during this period.
Exercise 3
Assume that a given local area has the following demand curve for owner-occupied residences.
QD = 8,000 – 0.001P
The supply of owner-occupied residences in the area is 4,000 homes.
1. Calculate the equilibrium price and quantity, and illustrate it graphically in a price-quantity diagram.
2. Determine the price elasticity of demand for owner-occupied residences at the equilibrium point.
3. Now demand rises by 10 percent. What is the new equilibrium in the short-term and in the longterm, respectively, assuming that there is free capacity (unchanged construction costs)?
Exercise 4
The property company Gefion has a broad portfolio of rental properties established by means of acquisitions over a 30-year period. To ensure ongoing development, the company is interested in promising projects.
Currently, the company is examining an offer for a property with 6 leases. The seller has an asking price of
DKK 6 million. The property takes in DKK 360,000 annually in rent; this amount is expected to remain un-
changed in the years to come. Gefion wants an annual return on its investments of 8 percent over a 30-year
horizon.
1. What bidding price will Gefion offer the seller?
2. Now assume that the lease contracts include an annual two-percent increase in rent. How will that
affect the bidding price?
3. The management of Gefion expects the general interest level to be reduced considerably in the
coming years, which lets the company reduce its business requirement of 8 percent per year to 6
percent per year, at the same time as rent is expected to rise by 2 percent per year. Assess the impact of this on the bidding price.
Exercise 5
1. Illustrate the supply of farm land on the Danish island of Mors in a price-quantity diagram.
2. What are the underlying factors that determine the demand for land? Draft the demand curve for
farm land in the above illustration.
3. What might explain a higher price on farm land on Mors than in the surrounding areas?
4. What would the above-normal profit of farming on Mors amount to at the equilibrium point?