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House Price, Quality and Economy
ERES Conference, Milan, June 2010
Paul de Vries
OTB Research Institute for the Built Environment
Delft University of Technology / The Netherlands
Delft University of Technology
OTB Research Institute for the Built Environment
Challenge the future
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House Price, Quality and Economic Growth, ERES 2010 2 of 19
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Country
Liechtenstein
Qatar
Luxembourg
Bermuda
Jersey
Norway
Brunei
Kuwait
Singapore
United States
Ireland
Guernsey
Cayman Islands
San Marino
Hong Kong
Iceland
Switzerland
Andorra
Canada
Netherlands
OTB Research Institute
GDP - per capita (PPP) (US$)
118,000
85,600
79,600
69,900
57,000
54,900
54,400
54,300
48,500
46,300
45,100
44,600
43,800
41,900
40,500
40,100
40,000
38,800
38,700
38,600
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Outline
-
Interest, research questions, theory.
-
Long-run developments.
-
Survey’s: micro data.
-
Conclusions.
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House Price, Quality and Economic Growth, ERES 2010 4 of 19
Interest
Economic Growth
House Quality
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House Price
House Price, Quality and Economic Growth, ERES 2010 5 of 19
Research Question
Paper considers how the relationship between the house price
and the demand for quality changes with fluctuations in
economic growth.
-
What is the relationship between the preferred housing quality
and stage of economic growth?
-
Does the connection between the preferred quality and the
demand price change when the economic conditions change?
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Theory
1. Permanent income hypothesis suggests that aggregate
consumption for housing is a stable function of the average
income.
2. Over a long period, economic growth will push up incomes and
house prices and increase demand for better quality.
3. Quality demand is not constant but influenced by economic
growth.
4. There is a long-run development fed by fundamentals as incomes
and short-run developments fed by economic growth.
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Housing market imperfection
1. In many countries the housing market is imperfect.
2. That inefficiency is due the fact that economic forces have not
played out => imbalance in the housing market.
3. Long-run development and short-run developments have both an
impact on house prices.
-
Long-run: demographic shifts, fiscal policy, policy financial
institutions, income
-
Short-run: economic phase, interest rates, house price(t-1)
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Real House Price
1630-2010, euro, yearly
300
House Price
x 1000
(real euro 2009)
250
Credit Crunch
2008
200
Start Industrial Revolution
1850
2nd Oil Crisis
1979
Napoleon
1795
150
100
50
OTB Research Institute
2010
1990
1970
1950
1930
1910
1890
1870
1850
1830
1810
1790
1770
1750
1730
1710
1690
1670
1650
Crash Tulip Market 1637
1630
0
3rd English War 1672-1674
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Gross Domestic Product (GDP)
1920-2010, %, yearly
10
%
8
6
4
2
-4
-3.6
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
-2
1920
0
-4.0
-6
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GPD and House Price
1995-2010, %, Quarterly change
25,0
%
20,0
house
price
15,0
10,0
5,0
GPD
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
-5,0
1995
0,0
-10,0
-15,0
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GPD and House Price
1995-2010, %, Quarterly change, [R2 = 0.62]
25,0
House Price
20,0
15,0
10,0
5,0
GPD
0,0
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
-5,0
-10,0
-15,0
OTB Research Institute
y = 0,0372x 3 + 0,0409x 2 + 1,2391x + 2,6892
R2 = 0,6229
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Economic patrons
Table 1
Economic patrons 1995-2008
Economic
Low
Middle
Hi
GDP
Inflation
1.2
2.8
4.2
1.9
2.3
2.2
Purchasing
Power
-0.1
2.0
2.2
Interest rata
4.5
5.6
5.5
Nominal House
Price
1.4
5.0
13.9
Source: Statistics Netherlands, Cadastre Netherlands, Dutch Central Bank, CPB /calculations OTB
Research Institute (TUDelft)
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Micro data
House Buyers in Profile
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1,300 potential house buyers
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Information about:
-
-
Demand prices and preferred house quality
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All kind of characteristics
Surveys:
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Last months of 1995, 1996, 1997, 1998, 1999
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First month of 2002, 2004, 2006, 2008, (2010)
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Preferred quality and stage of
economic growth
100
%
architecture
Low
Middle
80
100
%
80
High
Owner Occupied or Rental
Low
60
Middle
40
40
High
20
20
0
0
60
experimengtal
50
modern
%
30
traditional
In the city?
Low
Middle
High
10
-10
city centre city suburbsmall town
OTB Research Institute
nearby
no
small town preference
centainly owner occupied
no preference
Differences between low, middle
and high growth phases are
small (table 2). However, during
the recovery people seeking on
the outskirts of cities and are
more active on the housing
market.
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Multinomial logistic regression: The
preferred quality and stage of
economic growth
Odd ratios
Middle
no preference
High
no preference
newly built
Middle
existing
nearby small town
High
no preference
centainly owner occupied
small town
appartment
detached, 1 or 2 floors
city suburb
detached, no floors
semi-detached
city centre
row
0,00
1,00
2,00
0,00
1,00
2,00
3,00
4,00
5,00
6,00
The stronger the economy becomes, the more the chances increase
of housing demand based on better quality of the home and its
environment.
In a stagnant economy, the emphasis in demand is on affordability
rather than better quality.
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Quality, Price and Economy
1. Does the connection between the preferred quality and the
demand price change when the economic change?
a. Per economic phase a hedonic model.
b. Including Pratt’s Importance (table 4).
c. Test the deviation between regression coefficients.
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Signification of the deviation
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Conclusions
1. High-growth economy => better-quality property => prepared to
pay for it.
2. Stagnant economy => demand for quality second place to the
demand for affordable homes.
3. There is a mechanism that trades off quality against affordability.
4. Chance that households in a medium- and high-growth phase
will demand more quality than in a low-growth phase.
5. It appears that appreciation of quality varies, particularly
between the low-growth phase and the medium-growth phase.
6. The price-quality relationship barely varies between the mediumgrowth and high-growth phases.
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NL
House price 2009
Annual % change
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