House Price, Quality and Economy

1. 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

4. Outline • Interest, research questions, theory. • Long-run developments. • Survey’s: micro data. • Conclusions.

5. Interest Economic Growth House Quality House Price

6. 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?

7. Theory • Permanent income hypothesis suggests that aggregate consumption for housing is a stable function of the average income. • Over a long period, economic growth will push up incomes and house prices and increase demand for better quality. • Quality demand is not constant but influenced by economic growth. • There is a long-run development fed by fundamentals as incomes and short-run developments fed by economic growth.

8. Housing market imperfection • In many countries the housing market is imperfect. • That inefficiency is due the fact that economic forces have not played out => imbalance in the housing market. • 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)

9. Real House Price 1630-2010, euro, yearly

10. Gross Domestic Product (GDP) 1920-2010, %, yearly

11. GPD and House Price 1995-2010, %, Quarterly change

12. GPD and House Price 1995-2010, %, Quarterly change, [R2 = 0.62]

13. Economic patrons

14. Micro data House Buyers in Profile • 1,300 potential house buyers • Information about: • Demand prices and preferred house quality • All kind of characteristics • Surveys: • Last months of 1995, 1996, 1997, 1998, 1999 • First month of 2002, 2004, 2006, 2008, (2010)

15. Preferred quality and stage of economic growth 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.

16. Multinomial logistic regression: The preferred quality and stage of economic growth Odd ratios 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.

17. Quality, Price and Economy • Does the connection between the preferred quality and the demand price change when the economic change? • Per economic phase a hedonic model. • Including Pratt’s Importance (table 4). • Test the deviation between regression coefficients.

18. Signification of the deviation

19. Conclusions • High-growth economy => better-quality property => prepared to pay for it. • Stagnant economy => demand for quality second place to the demand for affordable homes. • There is a mechanism that trades off quality against affordability. • Chance that households in a medium- and high-growth phase will demand more quality than in a low-growth phase. • It appears that appreciation of quality varies, particularly between the low-growth phase and the medium-growth phase. • The price-quality relationship barely varies between the medium-growth and high-growth phases.

20. House price 2009 Annual % change NL