Two Modes of Housing Market Behaviour

Cross-country analysis of the dynamics of housing price indices shows the dominance of two patterns. Thus, we can talk about two modes of market state: stability and positive trend. A particular country, like Spain, may have a changing sequence of different modes, lasting for 5-10 years. In other countries one of these modes can be dominant (stable prices in Austria, small trend in Netherlands). The pricing of real estate is a complex process. It differs from standard microeconomic model by the following aspects: a) housing is a durable good, so that it has both investment and consumption properties, b) its price depends on future value of flow of housing services, that depends on uncertain path of different factors including interest rate, c) it is heterogeneous good, where we have close substitutability between different types of housing and housing in different locations, d) it is imperfect investment good, due to lower liquidity and higher transaction cost in comparison with financial assets. There exists no unique framework of analysis in theoretical economics, which can be applied here: microeconomics is static, urban economics focuses on spatial patterns and not on dynamics. Static models can give only partial explanations. Data on construction and population growth allow for prediction of the shift in demand and supply curves, but this typically does not explain all price change. Not only changing wealth and preferences should be considered, but also different price expectations for different groups of agents. Economic growth contributes to Balassa-Samuelson effect, and since housing is the main fraction of non-tradable goods, housing price inflation can exceed CPI growth. Thus, the behaviour of different types of agents ñ owners, renters and investors ñ should be taken into account. While in the markets with stable housing prices there are no investors, they are present in markets with growing price trend. Positive trend can be caused either by wrong expectations (bubble) or transition phenomena, related to growth or institutional changes in mortgage markets, but it is never sustainable in the long run. Thus, the periods of price growth typically last for several years, and then prices either drop or stabilize. Real estate markets can be influenced by unpredictable events, like natural hazards. In some cases (when events occur frequently or when there exist efficient insurance markets) market indices are not affected significantly, since risk is already incorporated in market price. More difficult cases include rare events, like catastrophic tsunami. In a similar manner, human created catastrophes (Chernobyl, 11th of September) should also influence local land rent, and the value of real estate. In the case of high risk strategic investors are not likely to be there, but price can still be unstable due to changing perception of risk.