Real Estate 'Cycles' : Some Fundamentals

This paper demonstrates that different types of real estate can have very different cyclic properties. Empirically, this is shown to be true, and the question is posed as to what might distinguish between property markets where movements are largely stable responses to repeated economic shocks as opposed to a continuing endogenous oscillation. A stock flow model is built in which the future expectations of agents, the development lag, the degree of durability and market elasticities all can vary. Experimental simulations with the resulting higher order difference equation reveal the dynamic behavior of the model varies quite sharply depending on all these factors. Forward-looking expectations by agents leads to stability, while myopic behavior promotes oscillations. Oscillations are also much more likely when supply is more elastic than demand, when development lags long, and when asset durability is low