pre - crisis developments in the hungarian housing market; a model with quality differential
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PRE-CRISIS DEVELOPMENTS IN THE HUNGARIAN HOUSING
MARKET;A MODEL WITH QUALITY
DIFFERENTIALÁron Horváth – János Vincze
Helmut Schmidt University – HamburgReal Estate Forecasting Workshop
November 24., 2011.
CONTENTS1. Overview of the Hungarian
residential real estate market. 2. The paper
2.1. The observation: quality differential
2.2. The model2.3. Impulse responses2.4. Calibration strategy
Overview of the Hungarian residential
real estate market
1.1. HOUSING MARKET IN THE SOCIALIST ERA – UNTIL 1989
One family – one flat rule. Few available investment assets. Unprofessional (governmental or
family built) construction industry - low quality homes.
1.2. HOUSING MARKET IN THE NINETIES
Mass amount of privatized flats. The flats were of deteriorated quality. Lack of credit market. Low supply and
demand also.
HOUSING MARKET AFTER THE MILLENNIUMThree pillars of the
change Overall economic
and financial stabilization.
More professional construction industry.
Huge governmental subsidy system.
HOUSING MARKET DURING THE CRISIS The crisis hit the Hungarian economy
severely. Three channels of the effect:
Decreasing income of households. Diminishing credit supply: banks had to
deal with their problem on the liability side.
Almost disappearing governmental subsidies because of the financial consolidation.
The prospects are still not very good.
The paper: a model with quality differential
OBSERVATION 1-2.
OBSERVATION 3! price of more expensive homes relative to the typical (median) home price
MODEL simple framework:
endogenous variables: price, quantity dynamic structure: lagging supply duplication by quality level: „good”
quality homes and „bad” quality homes
DEMAND Budget constraint
income wealth consumption expenditure
Quadratic utility function
SUPPLY Profitmaximizing company with
adjustment costs
Supply functions
THE DYNAMIC SYSTEM 6 equations
6 variables
SIMULATION: INCREASING INCOME
SIMULATION: INCREASING INCOME It explains the rise in house prices and
the construction boom. But its effect on relative prices is
positive.
SIMULATION: QUALITY SHORTAGE Anecdotical evidence on quality
shortage could explain the relative price pattern.
CALIBRATION STRATEGY I.(STEADY STATE) amortization parameters: technical
values. interest rate: expected yield of the
worse homes. supply parameters: based on the
relative price of the two kinds of flats transition parameter from good to worse
homes: expected yield of better homes
CALIBRATION STRATEGY II.(DYNAMICS)
adjustment cost parameters:To replicate the one and a half years’
reaction of the construction industry demand parameters: demand
elasticity characteristics in the distinct groups
income parameters: quadratic structure is narrow, other specifications should be applied
Thanks for your attention!
horvathar@eltinga.hu
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