Abstract
This chapter introduces the basic features of the real estate market. This is an imperfect highly segmented market. The segmentation is derived from the characteristics of traded goods. In order to understand the trend in the different submarkets, the following paragraphs analyse the trend patterns of stakeholders involved in the sale or purchase of property or in the use of a property. A classification of demand and supply is developed, identifying the main macroeconomic factors that affect these two functions and the interpretation about how they interact, is given.
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Notes
- 1.
An economic good is that if it is available in limited quantities, accessible and tradable.
- 2.
It is said that the buildings are physically motionless in the physical but movable from an economic point of view.
- 3.
The production as a creation of utility can be understood as material transformation (it is precisely the production building) or even temporal transformation or from person to person (real estate investment).
- 4.
The analysis of demand in the housing market involves, in addition to the parameters indicated, other variables that are subject to an in depth view in the following paragraphs.
- 5.
Reasons highlighted in the aforementioned research of Coons and Glaze.
- 6.
The concept of speculation comes from the word speculari, which means looking at things in order to take advantage of it, or even spying on the occasion (speculari opportunitatem of Velleio Patercolo, the historian of Tiberius). Only at the end of the eighteenth century the word speculation underwent a semantic shift, switch from intellectual to business vocabulary, to indicate the economic common sense attitude to observe the dynamics of formation of the wealth to gain an advantage (Lacaze 2008).
- 7.
In the event of loss is called capital loss.
- 8.
A market is perfect if it is characterized by strong competition and there are the following conditions: (1) there are a large number of buyers and sellers with the opportunity to undertake free negotiations, and (2) the good traded are of uniform quality, and (3) each operator has full knowledge of the characteristics of the asset.
- 9.
In an atomistic market, operators cannot affect prices through their activities: in this case, buyers and sellers must take the price (price-takers). Conversely, in a pure monopoly, the seller imposes the price and is, therefore, a price-maker. Between these extreme categories, there are markets where participants cannot fully control the prices, but they realize that their decisions affect them. The operators of such a market are therefore price-searchers.
- 10.
Specialist publications distinguish the individual markets for intended use (homes, offices, shops, etc.) and location (city and region), with an indication of the maximum and minimum prices per unit depending on the extrinsic, intrinsic, productive and technological characteristics.
- 11.
- 12.
If reference is made to the times for the realization of a project, in the case of common constructions, this interval can be considered equal to 1 or 2 years. For more complex projects, one must imagine a greater number of years, and this period is then extended over time to obtain all the authorization and for the execution of procedures required to start the work and product marketing.
- 13.
The constraints on the supply lead to an increase in the volatility of the real estate market. These constraints are derived primarily from the administrative procedures that dramatically reduce the elasticity by increasing the time and costs of the construction transformation process. In addition to this constraint, the low availability of sites for the construction and the resulting under-investment relative to the size of the existing building patrimony, leaves less space for the supply response compared to increases in demand. Regulation and geographical constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks, which in turn amplifies the volatility of house prices (Paciorek 2013).
- 14.
The primary goods have inelastic behavior with respect to price changes, but the houses are not all the same and some of them should be considered luxury goods (holiday homes, for example). In this case, the situation changes radically: the demand for luxury goods is more affected by the changes in price as consumers, for their purchase, are more prone to spend with discretion.
- 15.
By a cyclical movement we mean that as the system progresses in, e.g. the upward direction, the forces propelling it upwards at first gather force and have a cumulative effect on one another but gradually lose their strength until at a certain point they tend to be replaced by forces operating in the opposite direction; which in turn gather force for a time and accentuate one another, until they too, having reached their maximum development, wane and give place to their opposite. We do not, however, merely mean by a cyclical movement that upward and downward tendencies, once started, do not persist for ever in the same direction but are ultimately reversed. We mean also that there is some recognizable degree of regularity in the time-sequence and duration of the upward and downward movements. There is, however, another characteristic of what we call the trade cycle which our explanation must cover if it is to be adequate; namely, the phenomenon of the crisis—the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently, whereas there is, as a rule, no such sharp turning-point when an upward is substituted for a downward tendency (Keynes 1936).
- 16.
Shiller (2007) speaks of extravagant expectations of future price increases, which spread like a social epidemic.
- 17.
The cobweb model also postulates that the encounter between supply and demand defines a condition of stable equilibrium in the neighborhood of the equilibrium point when the elasticity of demand exceeds the supply. Although in the real estate market the supply is certainly characterized by a greater rigidity than demand, as previously mentioned, the interaction of the forces at play does not produce convergence towards a stable equilibrium condition.
- 18.
Houses are consumer goods, in the sense that they are purchased by individuals and not by businesses. About the properties that are not for self-use, it is said they have an indirectly or derived demand. This is the case of the cement used for the construction. Goods that have a derived demand tend to have a less stable pattern of demand with respect to property that is directly useful to the direct satisfaction of needs.
- 19.
Proof of the quality as a driver of demand can be provided by measuring the standard deviation of the real estate prices. With reference to the last expansion cycle of the property market cycle, which was accompanied by intense refurbishing and urban regeneration initiatives often implemented through the work of famous architects, it has been noticed that prices for all types of real estate tend to differentiate more and more around their average values.
- 20.
Gjerstad and Smith (2010) say In the recession that hit the world economy in the last century, the expenditure for the purchase of new housing tends to decrease prior to a general economic crisis and the percentage decrease in property expenditure is much greater than that for other components of aggregate output. This pattern is found in the case of ten out of eleven recessions, including the Great Depression of ‘29.
- 21.
Tsatsaronis and Zhu (2004) broadly support this thesis, highlight the fundamental role in the dynamics of real estate prices exerted by the “cost of mortgage credit and the conditions under which it is made available”, thereby specifying that property values are more sensitive to changes in short-term rates. On the relationship between financial credit and real estate market volatility, see also Nguyen (2013), Anundsena and Jansenb (2013). This study shows that there is a two-way relationship in the long term between credit market and real estate market. The increase in house prices lead to an expansion of credit, which in turn puts upward pressure on prices. Interest rates affect house prices indirectly through the credit channel.
- 22.
Between the two markets, however, there is a profound difference. While the stock market is slightly sensitive to inflation, the real estate market instead undergoes a huge influence from the inflationary trend. The investor who operates the stock market looks to equities as representing real capital—therefore their value in real terms is not affected by the change in inflation—the American investor who usually operates on the real estate market, instead, does so with little awareness, that is, he makes choices about the debt in relation to a nominal interest rate rather than to real rates.
- 23.
Jappelli et al. (2001) show that while in 1990, bank deposits and government bonds amounted to two-thirds of the families’ financial wealth, in 2001 they represented less than a third. “The void was filled by the increase of investments primarily in equities, mutual funds and other forms of asset management. The growing diversity of family assets towards forms of equity investment was induced by the decrease in the return of government bonds, reform measures, the wave of privatizations of public companies and the phase of strong growth in share prices”.
- 24.
In this case, the particular morphology that greatly reduces the supply of building land contributes to the “abnormality” of the data.
- 25.
An alternative to this approach is the structural model for the assessment of residential property that combines factors of supply and demand. Examples of application of this model are those already described above.
- 26.
In order to identify suspicious distortions in the housing market some economists observe and measure changes in the price-to-rents compared to the corresponding changes in the so-called “user cost”. The latter reflects the annual cost of a dwelling as a place of production of the “housing service” for the owner. The cost of housing services as an alternative to the lease, it is then considered as a reference indicator of the rental value. Poterba (1984), defines the user cost as the sum of contributions, calculated as a percentage on the price of housing, which reflect respectively: the lack of interest in alternative investments, to the purchase of housing, correct according to eventual benefits arising from the deduction of taxes or by deductibility of interest on mortgages; incidence of taxes on real estate; the depreciation of the cost of construction; the capital gain/loss attributable to the value of the property according to the market trends (the latter with a minus sign).
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Manganelli, B. (2015). The Real Estate Market. In: Real Estate Investing. Springer, Cham. https://doi.org/10.1007/978-3-319-06397-3_1
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