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System Dynamics as a complementary method for Real Estate

System Dynamics as a complementary method for Real Estate. June 27th, 2009 Martijn Eskinasi. What is system dynamics?. An explanatory and simulation methodology Used for both quantitative and qualitative modeling Used in expert approach and interactive learning processes Its claim to fame:

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System Dynamics as a complementary method for Real Estate

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  1. System Dynamics as a complementary method for Real Estate June 27th, 2009 Martijn Eskinasi

  2. What is system dynamics? • An explanatory and simulation methodology • Used for both quantitative and qualitative modeling • Used in expert approach and interactive learning processes • Its claim to fame: • “Find robust policy measures for highly complex dynamic problems”

  3. Basic ideas & concepts • Structure of a system drives its dynamic behaviour in time • Structure is based on causal loop, stocks and flows • Policy measures are very tenacious • Because people cannot mentally simulate highly complex dynamic systems • Murphy's law in practice??

  4. Causal loops and feedback • Axioma of circular causalities and feedback • Reality consists of intertwined causal loops • “Laundry list thinking” is not realistic, • at least does not lead to dynamic behaviour • Identify causal relations • Positive and negative polarities • Identify the causal loops! • Balancing and reinforcing

  5. Some simple examples Structure Behaviour Rent B Demand O Investor frenzy YieldCompression R

  6. Some small examples • Flows are change rates over time • Stocks integrate and accumulate Stock Construction Demolition

  7. But modeling can get complex rapidly

  8. Track record of SD in Real Estate • J.W. Forrester (1969), Urban Dynamics • Bakken & Sterman (1993) Commercial RE flight simulator • Barlas et al (2007) RE Price oscillations in Istanbul • Cheng (2005) Modeling Shanghai RE Markets • Klammt (2000) Modeling in CREM • Kummerow (1999) Cyclical Office Oversupply • Price & Kelly (2005) Boston Housing Dynamics • And much more

  9. Drawbacks No spatial dimension Risk of complexity Evaluation of usefulness for RE research • Assets • Strong basic paradigm • Stock / flow concept • SD Society • Expert and interactive • Software www.systemdynamics.org

  10. Putting SD to the test Demand Rent Interest Interest Rent Interest Demand curve O O Price B Stock Price Stock Construction Stock adjustment Construction curve Stock adjustment Delay Construction

  11. Testing a simple simulation model Wheaton & DiPasquale • Test for demand shift • At t =10: 600k + 10% • Test for interest change • At t =60: 5% → 6%

  12. Conclusion and discussion • System Dynamics is a useful method for RE Research • Complex systems and dynamic behaviour • Stock and flows as building blocks • Scientific community, track record, software • A simple WdP model provides plausible results • Responds to market stimuli as expected • We will see an upswing in SD RE Research • But that's ultimately up to you....

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