Download - 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.
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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
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Overview of the Hungarian residential
real estate market
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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.
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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.
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HOUSING MARKET AFTER THE MILLENNIUMThree pillars of the
change Overall economic
and financial stabilization.
More professional construction industry.
Huge governmental subsidy system.
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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.
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The paper: a model with quality differential
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OBSERVATION 1-2.
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OBSERVATION 3! price of more expensive homes relative to the typical (median) home price
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MODEL simple framework:
endogenous variables: price, quantity dynamic structure: lagging supply duplication by quality level: „good”
quality homes and „bad” quality homes
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DEMAND Budget constraint
income wealth consumption expenditure
Quadratic utility function
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SUPPLY Profitmaximizing company with
adjustment costs
Supply functions
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THE DYNAMIC SYSTEM 6 equations
6 variables
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SIMULATION: INCREASING INCOME
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SIMULATION: INCREASING INCOME It explains the rise in house prices and
the construction boom. But its effect on relative prices is
positive.
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SIMULATION: QUALITY SHORTAGE Anecdotical evidence on quality
shortage could explain the relative price pattern.
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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
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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