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The behaviour of housing developers and aggregate housing supply

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  • Jacek Laszek
  • Krzysztof Olszewski

Abstract

The article presents an theoretical analysis of the developer sector, which bases on the observed functioning of the market. We explain the behaviour of developers in the short and medium run and show why they add to the creation of a real estate bubble instead of mitigating it. The bubbles result from the interactions between housing developers who keep high prices and households, who increase housing demand even if house prices rise. The housing developer, due to the asymmetry of information, is able to take advantage of a local monopoly and differentiate prices. This allows him to sell apartments of a similar construction to each client at a different price, thanks to which he maximizes profits. However, when the developer overestimates demand or the competition gets tougher, his production costs grow and the possibility to differentiate prices is reduced. This has a direct impact on the profits that he can generate. The consequence of this phenomenon is a more flexible ex post curve of developer supply. As a result, there is a tendency to overproduction in the developer sector, which deepens the cyclical nature of the housing market.

Suggested Citation

  • Jacek Laszek & Krzysztof Olszewski, 2015. "The behaviour of housing developers and aggregate housing supply," NBP Working Papers 206, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:206
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    References listed on IDEAS

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    6. Hanna Augustyniak & Laszek Jacek & Krzysztof Olszewski & Joanna Waszczuk, 2013. "Modelling of cycles in the residential real estate market – interactions between the primary and the secondary market and multiplier effects," NBP Working Papers 143, Narodowy Bank Polski.
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    Cited by:

    1. Yi-Kai Juan & I-Chieh Lin, 2018. "Optimal Cost–Quality Trade-Off Model for Differentiating Presale Housing Quality Strategies," Sustainability, MDPI, vol. 10(3), pages 1-17, March.
    2. Hanna Augustyniak & Jacek Łaszek & Krzysztof Olszewski & Joanna Waszczuk, 2013. "Housing market cycles – a disequilibrium model and its application to the primary housing market in Warsaw," Chapters from NBP Conference Publications, in: Hanna Augustyniak & Jacek Łaszek & Krzysztof Olszewski (ed.), Papers presented during the Narodowy Bank Polski Workshop: Recent trends in the real estate market and its analysis, 2013, chapter 11, pages 5-38, Narodowy Bank Polski.
    3. Christophe André, 2016. "Household debt in OECD countries: stylised facts and policy issues," Chapters from NBP Conference Publications, in: Hanna Augustyniak & Jacek Łaszek & Krzysztof Olszewski & Joanna Waszczuk (ed.), Papers presented during the Narodowy Bank Polski Workshop: Recent trends in the real estate market and its analysis - 2015 edition, chapter 2, pages v1, 33-85, Narodowy Bank Polski.
    4. Krzysztof Olszewski & Hanna Augustyniak & Jacek Laszek & Robert Leszczynski & Joanna Waszczuk, 2016. "On the dynamics of the primary housing market and the forecasting of house prices," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.

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    More about this item

    Keywords

    Real and virtual supply curve; monopolistic competition; price discrimination; acceleration of demand; overproduction.;
    All these keywords.

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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