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On the dynamics of the primary housing market and the forecasting of house prices

In: Combining micro and macro data for financial stability analysis

Author

Listed:
  • Krzysztof Olszewski
  • Hanna Augustyniak
  • Jacek Laszek
  • Robert Leszczynski
  • Joanna Waszczuk

Abstract

This article discusses and explains the dynamics of the primary housing market, focus-ing on housing supply, demand, price and construction costs dynamics. We focus our attention on the primary housing market, because it can create an excessive supply, which can cause distress to the economy. Due to multiplier effects, even small changes in fundamental factors, such as a minor changes in the interest rate, result in demand shocks. Positive demand shifts cannot be easily satisfied, as supply is rigid in the short run. This usually makes house prices grow and developers increase their production, which will be delivered to the market with a lag. Housing developers have the marketing tools to heat up the market for a prolonged period of time. Rising prices can lead to further demand increases, because housing is a consumer and an investment good. When demand moves back to its long run level, the economy is left with excessive supply, falling prices and bad mortgages. We create a simple four-equation model, which is able to replicate the dynamics of the Warsaw primary housing market. Our model replicates historical data in an appropriate way and we apply it to forecast house prices in the next two years on quarterly basis.
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Suggested Citation

  • Krzysztof Olszewski & Hanna Augustyniak & Jacek Laszek & Robert Leszczynski & Joanna Waszczuk, 2016. "On the dynamics of the primary housing market and the forecasting of house prices," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41 Bank for International Settlements.
  • Handle: RePEc:bis:bisifc:41-25
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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