Abstract
Classic theory suggests that the real estate market cycle reflects the consequences of an inherent self-correcting pattern. Previous studies found evidence showing the existence of two stochastic processes, serial correlation and mean reversion, in housing price dynamics. The present study utilized data from the Taiwan housing market to observe whether the self-correction pattern driven by housing demand occurs and whether it can explain the housing dynamics. This paper hypothesizes that the demand side of the housing market causes a self-correcting mechanism of housing prices. The hypotheses are examined using panel data of five major cities in Taiwan. Empirical evidence reveals that when housing prices rise, housing affordability decreases, followed by reduction in self-occupancy housing demand. Furthermore, change in demand structure raises the risk of prices dropping because of an increase in investment-motivated housing demand, eventually resulting in lower housing prices.
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