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The Role of Speculation in Real Estate Cycles

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  • Stephen Malpezzi
  • Susan M. Wachter

Abstract

Our study investigates the role of speculation in real estate cycles. We find that even a simple model of lagged supply response to price changes and speculation is sufficient to generate real estate cycles. Second, the volatility of prices - the biggest purported downside of "speculation" - is strongly related to supply conditions. Even more interestingly, the effect of speculation itself depends on supply conditions. Markets with more responsive regulatory environments, or less natural constraint (from physical geography), will experience less volatility as well as less behavior characterized as speculation. Demand conditions in general, and speculation in particular, can contribute to a boom and bust cycle in housing and real estate markets - but the effects of speculation appear to be dominated by the effect of the price elasticity of supply. In fact, the largest effects of speculation are only observed when supply is inelastic. Thus effective policies will focus on improving the efficiency of the supply of developable land, and real estate generally, including the development of an appropriate regulatory framework for real estate.

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Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number 401.

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Handle: RePEc:wop:pennzl:401

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Cited by:
  1. García Serrano, Carlos, 2012. "Del pasmo al marasmo: El sector de la construcción y su relación con la crisis del empleo/The Construction Sector and its Relationship With the Employment Crisis," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 183-182, Abril.
  2. Yeon-Koo Che & Ian Gale, 2006. "Market Versus Non-Market Assignment of Initial Ownership," Discussion Papers, Columbia University, Department of Economics 0607-05, Columbia University, Department of Economics.
  3. Gunther Maier & Shanaka Herath, 2009. "Real Estate Market Efficiency: A Survey of Literature," SRE-Disc sre-disc-2009_07, Institute for the Environment and Regional Development, Department of Socioeconomics, Vienna University of Economics and Business.
  4. Quigley, John M. & Raphael, Steven & Rosenthal, Larry A., 2008. "Measuring Land-Use Regulations and Their Effects in the Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series, Berkeley Program on Housing and Urban Policy qt07t5d0q4, Berkeley Program on Housing and Urban Policy.
  5. Qin Xiao & Donghyun Park, 2010. "Seoul housing prices and the role of speculation," Empirical Economics, Springer, Springer, vol. 38(3), pages 619-644, June.
  6. Ebrahim, M. Shahid, 2009. "Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(3), pages 864-883, December.
  7. Ebrahim, M. Shahid & Mathur, Ike, 2007. "Pricing home mortgages and bank collateral: A rational expectations approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(4), pages 1217-1244, April.
  8. Qin Xiao & Randolph Gee Kwang Tan, 2006. "Signal Extraction with Kalman Filter: A Study of the Hong Kong Property Price Bubbles," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 0601, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  9. Park, Donghyun & Xiao, Qin, 2009. "Housing Prices and the Role of Speculation: The Case of Seoul," ADB Economics Working Paper Series 146, Asian Development Bank.
  10. Li-Min Hsueh & Hsi-Peng Tseng & Chang-Chiang Hsieh, 2007. "Relationship Between the Housing Vacancy Rate, Housing Price, and the Moving Rate at the Township Level in Taiwan, in 1990 and 2000," International Real Estate Review, Asian Real Estate Society, Asian Real Estate Society, vol. 10(1), pages 119-150.
  11. Wei Li, 2008. "Property tax and speculative bubble: An empirical analysis of Tianjin," Psychometrika, Springer, Springer, vol. 3(4), pages 627-643, December.
  12. Richard K. Green & Susan M. Wachter, 2007. "The housing finance revolution," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 21-67.
  13. Mynbaev, Kairat & Ibrayeva, Saniya, 2011. "Housing market of Almaty," MPRA Paper 36683, University Library of Munich, Germany.
  14. Franz Fuerst & Anna-Maija Grandy, . ""Oft Expectation Fails": A Time-Series Analysis of Construction Starts in the London Office Market," Real Estate & Planning Working Papers, Henley Business School, Reading University rep-wp2010-13, Henley Business School, Reading University.

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