A regional house price model of excess demand for housing

THE EMPIRICAL MODEL An empirical analysis applied the algebraic econometric model using RICS regional monthly data on unsold houses and rate of sales in the last three months to calculate the implied time on the market T2. Quarterly regional price data was taken from the Nationwide. The empirical results show the expected signs, are statistically significant at the 5% level and support the theoretical analysis. Estimates of the unobservable long run time on the market, the short run equilibrium profit maximizing deviation from the long run price and time on the market, and the change in the distribution of valuation for a deviation in the implied time on the market from the long run equilibrium are backed out from the empirical results. The theory cannot provide any basis for deciding the real time it takes for the perception of the distribution of valuations to alter in response to deviations in T2. This is an empirical matter. The analysis is run on quarterly data but it takes two quarters for deviations in T2 from the long run value to impact on the inferred distribution of valuation. The RICS data is monthly but we were unable to obtain time series monthly regional house price data. If monthly regional house price data could be made available, it would be possible to investigate the precise lag structure of the change in the distribution of valuations. THE INSIGHTS The insights are that if all new information was instantly impounded in house prices, then the average actual time on the market (T1) would not alter over time, the implied time on the market (T2) i.e. the ratio of unsold houses to sales rate would also be constant over time and both of these would equal T3, the long run equilibrium time on the market. All adjustments would occur via changing house prices. But the real world is very different. The analysis shows that there is no efficient system for prices to rapidly eliminate excess demand, and it is the build-up or run-down of unsold houses on the market that leads to a) actual prices diverging from equilibrium prices in order to eliminate unsold inventory left over from past pricing errors, and b) a re-assessment as to what the equilibrium price actually is.