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Recent Trends in the Real Estate Market and Its Analysis

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Recent Trends in the Real Estate Market and Its Analysis Recent tRends in the real estate market and its analysis Recent tRends in the real estate market and its analysis Scientific Editors Jacek Łaszek Krzysztof Olszewski Roman Sobiecki OFICYNA WYDAWNICZA SGH SZKOŁA GŁÓWNA HANDLOWA W WARSZAWIE WARSZAWA 2018 Reviewer Leszek Pawłowicz © Copyright by SGH Warsaw School of Economics, Warsaw 2018 All rights reserved. Any copying, reprinting or distribution of a part or the whole of this publication without the prior permission of the publisher is forbidden. First Edition ISBN 978-83-8030-261-7 SGH Publishing House 162 Niepodległości Ave., 02-554 Warsaw, Poland www.wydawnictwo.sgh.waw.pl e-mail: [email protected] Cover design and production ADYTON DTP DM Quadro Print and binding QUICK-DRUK s.c. e-mail: [email protected] Order 155/XII/18 Contents Introduction 11 1. Housing market and the financial sector 12 2. Country experience 15 3. Commercial real estate 16 Christophe André and Thomas Chalaux Chapter 1. Real estate booms, recessions and financial crises 17 1. Real housing price cycles in OECD countries 18 2. Real estate and financial crises: an historical overview 24 2.1. The Spanish banking crisis of the 1970s 24 2.2. The US Savings and Loans crisis 25 2.3. The Japanese asset price bubble 27 2.4. The Nordic banking crisis 29 2.5. The Asian financial crisis 32 2.6. The global financial crisis and the Great Recession 35 3. Mechanisms at play in a typical boom-bust real estate cycle 48 4. Policy responses: prevention and crisis management 52 Literature 57 George Andrew Matysiak Chapter 2. Automated Valuation Models (AVMs): Here to stay 65 Introduction 65 1. Modeling residential property prices 66 2. Automated valuation models 68 3. Measuring AVM accuracy and qualifying valuation estimates 71 3.1. AVM accuracy levels 72 3.2. UK 72 3.3. USA 74 3.3.1. HouseCanary 74 3.3.2. Zillow 76 3.4. Comment on the US AVM accuracy figures 78 3.5. Validating AVMs 79 4. Margin for error 80 5. Discussion and conclusion 81 Literature 83 6 Contents Jacek Łaszek, Krzysztof Olszewski and Hanna Augustyniak Chapter 3. A simple model of the housing market and the detection of cycles 87 Introduction 87 1. Housing market fundamentals 88 1.1. The fundamental housing model 89 2. Cycles on the market 92 2.1. Detection of cycles and their phases 94 3. Cycles in the Polish housing market 95 Conclusions 101 Literature 102 Hanna Augustyniak, Robert Leszczyński, Jacek Łaszek, Krzysztof Olszewski and Joanna Waszczuk Chapter 4. Empirical analysis of the determinants of the housing cycle in the primary housing market and its forecast 103 Introduction 103 1. A short overview of the Polish housing market 106 2. Estimation of the housing demand and supply dynamics 108 3. Forecasting of house prices 113 Conclusions 117 Literature 118 Wanda Cornacchia and Mara Pirovano Chapter 5. A guide to early warning models for real estate-related banking crises 123 Introduction 123 1. Data requirements 124 1.1. Left-hand-side variable: how to define a real-estate related banking crisis? 124 1.2. Right-hand-side variables: cyclical and structural indicators 127 2. Main modeling and evaluation techniques 130 2.1. The non-parametric signaling approach 130 2.2. Logit EWMs: binary and ordered logit models 132 2.3. Linear regression models through Bayesian Model Averaging 134 3. Forecasting exercise 135 Conclusions 135 Literature 136 Indranarain Ramlall Chapter 6. Establishing a framework for financial stability risk assessments in the real estate sector 139 Introduction 139 1. Literature review 139 Contents 7 2. A framework for financial stability risk assessment in the real estate sector 141 2.1. Composition of the real estate sector 142 2.2. Knowledge of the structure of the economy with respect to the real estate sector 144 2.3. Causes of instability in the real estate sector 145 2.4. Metrics for real estate sector analysis 147 2.5. Network approach to systemic risk analysis in the real estate sector 151 2.5. Policies to bolster financial stability in the real estate sector 156 Conclusions 160 Literature 160 Michał Wydra Chapter 7. Mortgage insurance, its effectiveness and impact on financial stability based on selected crisises – recommendations for Poland 163 Introduction 163 1. Sample programs and scope of activities in the world 164 2. The impact of financial insurance on the stability of the real estate financing market and the financial system 169 3. Impact of mortgage insurance on the effectiveness and stabilization of the mortgage loan insurance market 173 4. Examples of insurance markets and their general experience during crises 180 5. Detailed recommendations for the Polish market 183 Conclusions – applications for Poland 185 Literature 186 Piotr Śliwka Chapter 8. Proposed methods for modeling the mortgage and reverse mortgage installment 189 Introduction 189 1. Modeling and forecasting the probability of death qx and real estate prices 191 2. Results 194 2.1. Average life expectancy 195 2.2. Installment of a mortgage pension 195 2.3. Proposal to designate a “reverse mortgage” installment 197 2.4. Economic result 199 Conclusions 200 Appendix A 202 Appendix B 203 Literature 204 8 Contents Michael Lea Chapter 9. US housing finance policy in the aftermath of the crisis 207 Introduction 207 2. The government response to the mortgage meltdown 209 Conclusions: what has changed? 232 Literature 235 Christian Beer, Karin Wagner Chapter 10. Households’ housing expenditure in Austria, Germany and Italy [originally published in Monetary Policy and the Economy Q4/17] 239 1. Data sources and definition of housing expenditure 240 2. Comparison of tenure status and features of the national housing markets 243 3. Current housing expenditure 248 Final conclusions 253 Literature 254 Annex 255 Piotr Kasprzak Chapter 11. Moral hazard of indebted households as a potential threat to macroeconomic stability – observations from the Spanish real estate bubble 257 Introduction 257 1. Moral hazard in the contemporary market economy 258 3. The Spanish economic boom and bust of the first decade of EMU 263 3. Growing dependence of the economy on the banking sector 270 4. The bubble related social change reflected in remodeling of the Spanish political scene 274 Conclusions 278 Literature 281 Joanna Waszczuk Chapter 12. Estimation of housing prices – comparison of spatial methods in the Warsaw housing market 283 Introduction 283 1. Literature review 284 2. Methodology 287 3. Empirical results 289 Conclusions 293 Literature 294 Appendix 296 Contents 9 Andrei Radulescu Chapter 13. The housing prices in Romania – recent developments 297 Introduction 297 1. Methodology 299 2. Results 301 3. Conclusions 302 Literature 303 Virgilijus Rutkauskas, Darius Kulikauskas, Vaidotas Šumskis Chapter 14. Financial soundness of Lithuanian households and the stability of the financial sector 305 Introduction 305 1. Literature on resilience of households with loans to various economic shocks 306 2. Data, methodology and assumptions 308 3. Stress test of households with loans and its results 313 Conclusions 318 Literature 320 Firano Zakaria, Filali Adib Fatine Chapter 15. Bubble on the Moroccan real estate market: Identification, cycles and macroeconomic conditions 321 Introduction 321 1. Literature review 323 2. Empirical studies 328 3. Statistical approach’s 331 3.1. First generation test 331 3.2. Second generation tests 334 4. Structural approach 338 4.1. West model 339 4.2. Kalman filter approach 341 5. Speculative bubbles cycles 349 6. Macroeconomic factors and simulation model 355 Conclusions 359 Literature 360 Tomas Reichenbachas Chapter 16. “Down the rabbit-hole”: Does monetary policy impact differ during the housing bubbles? 363 Introduction 363 1. Literature overview 365 2. Identifying housing price bubbles: some descriptive statistics 368 3. The methodology 370 10 Contents 3.1. Markov-switching structural Bayesian VAR 370 3.2. Identification 372 4. Empirical results 373 4.1. Model fit 373 4.2. Regimes fit 376 4.3. Regime-dependent dynamic effects of structural shocks 376 Conclusions 379 Literature 379 Annexes 381 Krzysztof Olszewski, Paweł Decyk, Krystyna Gałaszewska, Andrzej Jakubowski, Magdalena Kulig, Renata Modzelewska and Hanna Żywiecka Chapter 17. Hedonic analysis of office and retail rents in three major cities in Poland 383 Introduction 383 1. Analysis of rents for the three cities 384 1.1. Tri-City – offices 384 1.2. Tri-City – retail 385 1.3. Poznań – offices 387 1.4. Poznań – retail 388 1.5. Warsaw – offices 389 1.6. Warsaw – retail 389 Conclusions 390 Literature 391 Dariusz Trojanowski, Krzysztof Olszewski and Krystyna Gałaszewska Chapter 18. The robustness of office building investment in the low interest rate environment 393 Introduction 393 1. The accounting of a commercial investment and the stress test 396 1.1. Stress test to the DSTI and the FCFE 399 2. Analysis of the profitability of the office investment over the investment horizon under various interest rate and vacancy rate scenarios 401 Conclusions 405 Literature 406 Introduction Real estate plays an enormous role in developed economies, as residential real estate is used to satisfy the basic housing needs of the population, while commercial real estate is used in the global production chains. Commercial real estate gives place for firms which create the biggest value added in the production chain, namely the research and development in the beginning of the process and the services related to each product at the end of the production process. Also, the planning of the production, logistics, its financing and finally the sale and after- sale services are generated in modern office buildings. Those processes produce the biggest share of value added and are located in the biggest metropolises and attract skilled workers, who have better payed jobs than the average population. Those people can spend more money in shopping malls and ask for better living conditions, often buying housing with a mortgage.
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