Assignment; Bid rent essay PDF

Preview

Summary

Q1) An explanation of the charts using bid-rent theoretical model. You are expected to apply bid-rent theory in the context of the city when explaining the graphs...

Description

Assignment-2 Essay on Bid-Rent (Sydney and Warsaw) Q1) An explanation of the charts using bid-rent theoretical model. You are expected to apply bid-rent theory in the context of the city when explaining the graphs. Both the bid rent Graphs for Warsaw and Sydney demonstrate similar trend where the price of land decreases exponentially as you move further out from the city. Both Sydney’s and Warsaw’s curve exhibit similar features, however since Sydney is a larger city, the trend is extended over a larger distance. The key elements of both curves, which convey the most information regarding Warsaw’s and Sydney’s profile is firstly the exponential increase of bidding capacity as you move closer to the city, secondly, the stagnation of land rent after 5Km and 30Km respectively, thirdly the region between 0-3Km and 0-15Km on the curves where the bidding capacity experiences a sudden, and drastic increase. Also, regulations made by councils or natural physical features can cause slight increases or decreases evident in the Sydney Bid Rent curve (Mariano, 2011). The exponential increase in bidding capacity that arises when the distance from CBD decreases is attributed by consumer substitution and factor substitution. In general terms the Bid rent curve’s maximum occurs when distance from CBD approaches 0 (The Geometric centre). To maximise the household’s utility or the firm’s profit, locating their state of operation in the geometric centre will lead to larger accessibility to more variety of jobs (Bertaud, 2015). This contrasts with living on the periphery of the CBD and only being able to access a smaller proportion of jobs which is less attractive to both a firms and households hence the lower bidding capacity. Von Thunen’s (linear Bid rent model) assumes that when land price increases, the demand is unaffected, however in reality when demand reduces people begin to acquire less land area so they are able to firstly increase their bidding capacity and secondly be able to consume other non-housing goods . Consequently, when taking into consideration the Law of Demand, takes the form of an exponential curve. The stagnant nature of Sydney’s bid rent Curve from 30-85Km is perhaps due to the surrounding conditions of the Greater Western Sydney suburbs. Sydney has been extremely affected by all economic, social, and economic transformation which has occurred at different rates in all regions of Sydney (Mariano, 2011). Greater Western

Sydney Suburbs have been associated with poor accessibility to services as well as far distances for employment (Beer & Forster, 2002) . In addition, the protracted travel times have assisted in dichotomy between the East and west of Sydney and ultimately this has led to this region having a drastically lower bidding capacity. The fact these unfavourable characteristics are evenly dispersed in amongst Greater Western Sydney is reflected in the nearly constant flat bid rent curve, reducing minimally from 30-85Km.

Q2) Explain your understanding of how the land uses will change as you move away from CBD in the two cities. Additional references that relate to land use in these cities may be used to support your arguments. In general terms, land will be determined by the competition between the different alternative uses of that land, and ultimately the firm or household with the higher bidding capacity will acquire it (Parr, 2007). Within 0-2Km, Sydney City is dominated with expensive high rise commercial and residential buildings, with the high land value being attributed by landowners substituting capital for land area. A 2011 survey indicated that this region from 0-2Km from Sydney centre occupies residents which have a median income of Greater than $80,000, indicating that they do have sufficient financial capital to exchange for their more favourable (centralised) position in the CBD ( Kellyet al,

2013). Warsaw’s CBD is huddled with skyscrapers mainly used for office firms (75%) but also accommodates households (25%) (Magdalena, 2019). Both cities function as poly-mono centric cities with transportation occurring across all cities. However, the general trend of land use is that as you shift further out of the CBD, tall office firms, high density and Highrise developments become much less frequent, while low density housing increases in popularity which is perhaps due to parents catering for their larger families, this ranges from the periphery of the CBD to the outskirts of the city (Major Cities Unit, 2013).

As the distance away from the urban centre increases, the bidding capacity for the land decreases at an exponential rate, and assuming the market is competitive and not absent of any land markets, which it is for both Sydney and Warsaw, the bidding capacity will adjust to create local equilibrium. Considering that the geographic centre of Warsaw is

dispersed over 2 districts, Wola and Mokotow both these regions have undergone substantial development in the office sector leading to an increase in housing investments (Magdalena, 2019), particularly in Mokotow where large residential buildings are in amongst office buildings. Within the urban centre apartments in Mokotow have an average floor area of 46.1m2, however household with larger families have shown more interest in apartments further out from the geographic centre -- in Wilanow which is 2 regions Adjacent to Wola (the Urban centre) (Nerlo, Ł, 2016). Here, apartments are being developed that are on average 93.2m2 which demonstrates the exponential increase in bidding capacity-- factor substitution—when households substitute capital for land (Magdalena, 2019)

Q3) If you were to replace rent (on vertical axis) with population density in the graphs, then please write your understanding of how population density will change with distance from the CBD. Support your explanations with a conceptual graph (drawn without using actual data) of population density (on vertical axis) and distance (on horizonal axis). Shown in William Alonso’s theory of Bid rent, when prices (bidding capacity) rise with land that is closer to the CBD, due to both lower transportation costs and increased ease of accessibility to the central CBD, firms and households begin to sacrifice their capital for land, resulting in much higher levels of population density closer to the CBD, and this effect is attributed by both factor and consumer substitution. Without consumer substitution, the exclusive variable affecting Bid rent is transportation costs that Von Thunen discovered, however when the law of demand is recognised, house areas begin to decrease in size as you progress towards the city and households and forms begin to spend less on land area so they can have afford to purchase other goods (Bertaud, 2015). Warsaw’s city centre has 20 buildings over 80 metres high that are mainly comprised of office spaces (Owczarek, 2011). Even more fascinating and demonstrating both consumer and factor substitution is the fact that in the Mokotow district of Warsaw, there are an estimated 100,000 people working in office spaces every day. Consequently, this increase in density has caused many negative consequences impacting the city profile, most pertinently is the lack of car parks and traffic jams (Nerlo, Ł, 2016). On the other hand, Sydney experienced a flourishing of economic prosperity, which allowed more affluent

middle-class citizens to flee from the dense and substandard city housing to new lowdensity housing in garden suburbs—reducing the density levels in the CBD. Now in Sydney around half of the population live within 10km of the city centre, which is still the most in Australia (Major Cities Unit, 2013). To combat the uncontrolled density that develops in both these urban centres, governments create policies and regulations which ultimately restrict property developer’s freedom when determining heights of buildings. Rational office firms begin to increase their building heights closer to the city because this yields the most efficient outcome—because price of land per square metre is expensive, they make up for a lack of land area by building higher into the sky ultimately producing the same floor space as a household further out. Closer to the city it is more justifiable to construct taller buildings, and that is what increases the density when the distance from CBD decreases. When we replace the bid rent variable with density, both cities’ density curves will have similar features with the bid rent curve- showing an exponential increase in density as the distance from CBD decreases, the pertinent reason for this is due to both consumer and factor substitution where households and firms begin to occupy many levels above ground and by also reducing their floor area, in an attempt to reduce their land expenses (Parr, 2007).

Density levels with regulations and policies

Distance from Sydney CBD (km)

Figure 1: Example of Sydney's Density Pattern (Kulish, 2011)

Distance from Sydney CBD (km)

Figure 2: Density of Sydney City considering Government regulations on building height (Kulish, 2011).

Q4) Summarize your discussion with key messages. William Alonso’s Bid rent theory allows current day economists to understand the pattern of land use as a function of distance away from an urban CBD (Alonso, 1964). Although just a simplification of reality, bid rent theory serves as a foundation for more complex models in which assumptions are minimised and replaced with more detail and complexities, which provide conclusions that are more relevant to our advanced current society (Harvey, Jack, and Ernie Jowsey, 2003). Von Thunen demonstrated that land prices do increase linearly as distance from an urban centre decreases, however William Alonso was able to extend this theory, by considering both factor and consumer substitution, which provides the basis of a more relevant bid rent theory than Von Thunen. When located near the CBD, in both Sydney and Warsaw, households and office firms begin to reduce their land consumption and begin to occupy space above ground, consequently increasing the density in and around urban centres. Policies and regulation that do help scale down density levels, however both factor and consumer substitution demonstrate the existence of a trade off between Density and housing prices. In essence since land becomes more expensive closer to the CBD, households and office firms are prompted to economise on the use of the land by increasing the buildings height and reducing apartment floor area.

References Alonso W (1964), Location and Land Use: Toward a General Theory of Land Rent, Harvard University Press, Cambridge. Bertaud, A. (2015). The Spatial Distribution of Land Prices and Densities: The Models Developed by Economists. NY: Marron Institute of Urban Management. Major Cities Unit (2013). State of Australian Cities 2013. Department of Infrastructure and Transport. Canberra: Australian Government. Harvey, Jack, and Ernie Jowsey (2003), Chapter 12 – The Economics of Planning Controls in Urban Land Economics, Macmillan Education UK, pp. 182-201 Ling D.C., Archer W.R., (2005). Chapter 5: Market Determinants of Value, Real Estate Principles, McGraw-Hill Irwin, Boston Magdalena F (2019) Spatial, social, and economic dynamic of contemporary Warsaw – City profile

Kulish, M., Richards, A., & Gillitzer, C. (2011). Urban Structure and Housing Prices: Some Evidence from Australian Cities. Researve Bank of Australia. Nerlo, Ł. (2016). Wiezowce w przestrzeni Warszawy, praca licencjacka WGSR UW.

O’Sullivan, A., (2009), Chapter 6: Urban Land Rent in Urban Economics Owczarek, D. (2011). Zamkniete osiedla, czyli dylemat współczesnych polskich miast. Badanie porównawcze mieszkanców zamknietych i otwartych osiedli w Warszawie. Przeglad Socjologiczny, 60, 2–3. Parr, J.B. (2007) Spatial Definitions of the City: Four Perspectives, Urban Studies, Vol 44 (2), 381-392....