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Pre - Crisis Developments in the Hungarian Housing Market; A Model with Quality Differential

Pre - Crisis Developments in the Hungarian Housing Market; A Model with Quality Differential. Áron Horváth – János Vincze. Helmut Schmidt University – Hamburg Real Estate Forecasting Workshop November 24., 2011. Contents. 1. Overview of the Hungarian residential real estate market.

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Pre - Crisis Developments in the Hungarian Housing Market; A Model with Quality Differential

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  1. Pre-Crisis Developments in the Hungarian Housing Market;A Model with Quality Differential Áron Horváth – János Vincze Helmut Schmidt University – Hamburg Real EstateForecastingWorkshop November 24., 2011.

  2. Contents 1. Overview of theHungarianresidentialrealestate market. 2. The paper 2.1. The observation: qualitydifferential 2.2. The model 2.3. Impulseresponses 2.4. Calibrationstrategy

  3. Overview of theHungarianresidentialrealestate market

  4. 1.1. Housing market inthesocialistera – until 1989 • Onefamily – oneflatrule. • Fewavailableinvestmentassets. • Unprofessional (governmentalorfamilybuilt) constructionindustry - lowqualityhomes.

  5. 1.2. Housing market inthenineties • Massamount of privatizedflats. • The flatswere of deterioratedquality. • Lack of credit market. Lowsupply and demandalso.

  6. Housing market afterthemillenNium Threepillars of thechange • Overall economic and financialstabilization. • More professionalconstructionindustry. • Hugegovernmentalsubsidysystem.

  7. Housing market duringtheCrisis • The crisis hit theHungarianeconomyseverely. • Threechannels of theeffect: • Decreasingincome of households. • Diminishing credit supply: banks had todealwiththeirproblemontheliabilityside. • Almost disappearinggovernmentalsubsidiesbecause of thefinancialconsolidation. • The prospectsarestillnotverygood.

  8. The paper: a modelwithqualitydifferential

  9. Observation 1-2.

  10. Observation 3! price of more expensivehomesrelativetothetypical (median) homeprice

  11. Model • simpleframework: endogenousvariables: price, quantity • dynamicstructure: laggingsupply • duplicationbyqualitylevel: „good” qualityhomes and „bad” qualityhomes

  12. Demand • Budgetconstraint incomewealthconsumptionexpenditure • Quadraticutilityfunction

  13. Supply • Profitmaximizingcompanywithadjustmentcosts • Supplyfunctions

  14. The dynamicsystem • 6 equations • 6 variables

  15. Simulation: increasingincome

  16. Simulation: increasingincome • Itexplainstherisein house prices and theconstruction boom. • Butitseffectonrelativeprices is positive.

  17. Simulation: qualityshortage • Anecdoticalevidenceonqualityshortagecouldexplaintherelativepricepattern.

  18. Calibrationstrategy I.(steadystate) • amortizationparameters: technicalvalues. • interest rate: expectedyield of theworsehomes. • supplyparameters: basedontherelativeprice of thetwokindsofflats • transitionparameterfromgoodtoworsehomes: expectedyield of betterhomes

  19. Calibrationstrategy II.(dynamics) • adjustmentcostparameters: • Toreplicatetheone and a halfyears’ reaction of theconstructionindustry • demandparameters: demandelasticitycharacteristicsinthedistinctgroups • incomeparameters: quadraticstructure is narrow, otherspecificationsshould be applied

  20. Thanksforyourattention! horvathar@eltinga.hu

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