Developers, non‐linearity and asymmetry in the development cycle

Abstract

Summary There is some evidence of cyclical non‐linearities in the property market but the analytical techniques used to identify them provide no insight into their source or nature. Studies of other sectors of the economy suggest that a primary cause of non‐linearities is the differential response of agents to the same shocks at different stages of the business cycle. Developers are key agents in the property sector and their behaviour may vary between different stages of the development cycle. Computer‐based behavioural modelling is used formally to imitate alternative strategies developers might adopt to formulate profit expectations and, hence, to make development decisions. When developers use current costs and values to determine their expectations the effects of property market price signals are delayed but not exaggerated. When developers’ expectations are conditioned by past experience, the effects of price signals are both delayed and exaggerated. The results of the latter strategy are more marke...