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Real estate cycles
Applied business and economic forecasting
Fatih baser & kevin ntakoulas
What are Real estate cycles ?
What is the Real Estate Market?
Market could appear very different for someone who is looking to rent a property versus someone looking to buy a property
Residential real estate is a type of property, containing either a single family or multifamily structure, that is available for occupation for non-business purposes
Real estate market is a phrase used to describe the overall economic state of real estate, based largely on supply and demand
Prices and demand differ in areas
No matter what niche and what location and to what user, there are patterns that we can analyze and predict within that niche
What is a Business Cycle?
Cycle vs. Seasonality
Patterns of economic booms and busts that are characteristic of developed economies
Business cycle forecasting is the creation of conjectures about how the business cycle will unfold in the future
All kinds of economic data or "economic indicators" used to form predictions about the future
Seasonal pattern exists when a series is influenced by seasonal factors
Seasonality is always of a fixed and known period
Cyclic pattern exists when data exhibit rises and falls that are not of fixed period
The length of the current cycle is unknown beforehand
WHY do we forecast real estate Markets ?
Real Estate Forecasting
HOW do we forecast real estate MARKETS ?
Brown: Real estate is a heterogenous investment
Used OLS, ARIMA and Vector Autoregression
Forecasted Canadian real estate price index with ARIMA
Better results with combined markets: US, UK and Australian
Which variables are used for real estate ?
Keogh (1994): Framework for real estate market
Supply and demand determine prices
Take-up: Amount of space taken up (not necessarily new space)
Net absorption: Change in the occupied stock Represents new demand
Stock: Total amount of space in the market (occupied and vacant)
Physical construction: Physical supply of new stock
New Orders: New permits for building
Vacancy rate: Vacant space in percentage of total stock
Rents: Price to pay for leased space
Performance: i.e. yield = current income/price
What are we going to analyze ?
Case-shiller-index for house prices
Indeces to measure private US home prices
Developed by nobelist Robert Shiller
Data has been prepared by Standard & Poor since 2006
Repeat-sales method: new buildings are not considered
Year 2000 ≙ 100 175 today means national prices rose by 75%
Rent-Price-Ratio to assess rent level
Annual rent: $10,000
Average house price: $200,000
$200,000 / $10,000 = 20
Rent-Price-Ratio: $10,000 / $200,000 = 5,00%
The lower the ratio, the more attractive to rent space !
Development of Rent Prices in US
Development of House Prices in US
Development of rent-price-ratios
Characterized by rises in market values/prices and downfalls
Can be seen in many sectors of developed economies
Bsp.: Technology, Real Estate
Prediction of major expansion, peak and downfall phases
Not only on Prices, will be shown later on our own data set
Heterogenous , not only dependend from real estate rather than different economic
Combination of the markets
-Demand for space and supply of buildings. Demand not enough -> Vacancy -> Prices for rents drop
-Focusing on yields, determined by S&D.
-Investors consider occupier market (appartements) and other assets
-Influenced by Occupier and investment: Sending signals.
-Developing new buildings and providing new space for O and I
-Take-up: Firms can move to another location
-Net absorption: Especially interesting for investors. Can be derived from the vacancy rate.
Average house prices in US.
Nobelist [Nou Belist]
-constantly growing rents in the us
House prices were growing but fell rapidly due to financial crisis
Were Times where it made sense to buy private house and times where to rent space on supply and demand