Asymmetric Patterns of Demand-Supply Mismatch in Real Estate

Gianluca Marcato,Anupam Nanda

doi:10.1007/s11146-020-09812-2

Gianluca Marcato, Anupam Nanda

Open Access

https://doi.org/10.1007/s11146-020-09812-2

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Abstract

As expectations change, we may observe asymmetry in responses of economic agents over various phases of the economic cycles. In this paper, we analyze both demand and supply side information to understand the dynamics of price determination in the real estate market and examine the relationship between expectation parameters and demand-supply mismatch. Our hypothesis builds on the possibility that investors’ call for action in terms of their buy/sell decision and adjustment in reservation prices may provide valuable insights into impending demand-supply imbalances in the market. We study several real estate sectors to inform our analysis. The timeframe of our analysis (1995–2010) allows us to observe market dynamics over several economic cycles. We test our hypothesis variously using several measures of market activity within a structural panel VAR framework. Our analysis suggests that investors’ attitude may have substantial and statistically significant feedback effects in price determination. These results indicate noticeable asymmetry in responses during the boom, normal and recessionary periods.

Highlights

Introduction and MotivationA large number of studies in the last couple of decades have made attempt to understand the behavior of economic agents and roles those play in shaping investmentG
We study several real estate sectors over 1995–2010 and test our hypotheses variously using within a structural panel vector autoregressive (VAR) framework and analyzing impulse response functions
We examine various indicators of demand-supply imbalances and their relationship to the dynamics of price determination in real estate market

Summary

Introduction

Introduction and MotivationA large number of studies in the last couple of decades have made attempt to understand the behavior of economic agents and roles those play in shaping investmentG. Nanda decisions and determining market movements through their collective actions. Such behavior under various economic environments is not straightforward to examine as outcomes may change for different types of agents at different points of economic cycles. We focus on the real estate sector because it provides some unique features such as market imperfections and precautionary savings that lend support to the rational expectations permanent income hypothesis (Hall 1978). Real estate funds hold cash as a cushion in phases of the liquidity to avoid fire sales when property prices are falling. The distributed lag of past actual income determines a timing mismatch between the investment decision and the deployment of money (i.e. 6–9 months trading period; see Ling et al 2009)

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