Estimating a stock-flow model for the Swiss housing market

Abstract

Summary This paper analyzes the development of housing market imbalances, housing prices and residential investment in Switzerland within a stock-flow framework. In the long run, the desired level of residential capital stock and the existing residential capital stock revert. Empirical results indicate, however, that housing demand can diverge from the existing supply for several years due to the slow adjustment of the residential capital stock to shocks. In the short run, the market therefore has to be cleared by price adjustments. And indeed, it can be shown empirically that changes in prices are significantly and strongly dependent on the level of stock imbalances. Furthermore, housing prices prove to be an important determinant of residential investment, which in turn drives the adjustment process of the residential capital stock towards its desired level.

The Behaviour of Housing Developers and Aggregate Housing Supply

“…The empirical analysis of this issue was conducted by, among others, Stover (1986), Epple et al (2010) and Levin and Pryce (2009). A combined empirical analysis of supply and demand can be found in Tse et al (1999), Phang et al (2010) and Steiner (2010). Augustyniak et al (2013b) have expanded the above-mentioned analyses, taking into account the interaction between the primary market and the secondary market, which has a significant influence on the formation of cycles in the housing market.…”

Housing Market Cycles A Disequilibrium Model and Its Application to the Primary Housing Market in Warsaw

“…As the quarterly data shows seasonality and also is more prone to short-term shocks that we do not model here, we use the moving average over four quarters. We base on the previously described model and the housing stock adjustment literature (see Mayer andSommervoll, 2000 andSteiner, 2010). In aggregate terms there is an equilibrium housing stock level, corresponding to a specific price level.…”

Time-Varying and Regional Dynamics in Swiss Housing Markets

“…Fundamental values are determined by a rent (i. e. housing cost and return) and a supply/demand model as a function of household income and construction. 3 Investigating Swiss construction and housing markets, Steiner (2010), employing a stockflow framework showed, that a mismatch between desired level of residential capital stock and existing residential capital stock can diverge for some years. Therefore, imbalances have to be adjusted via prices, a surplus in housing leads to falling house prices, a housing shortage leads to rising house prices.…”

“…This means that shifts in demand are almost exclusively traduced into changes in residential prices. Steiner (2010) finds, that house prices are an important determinant for the evolution of residential investment, as well as cost shifting variables such as construction costs and mortgage rates. Her results show, that one third of the mismatch between existing and desired residential capital stock will be corrected in the following year.…”

“…13 Relative mortgage rate developments (calculated as quarter-over-previous-year-quarter growth rates) have been taken to proxy user costs. Monthly instalment payments directly depend on mortgage rates (see for instance DiPasquale and Wheaton (1994), Steiner (2010) or Hott and Monnin (2008)). If the mortgage rate declines, user costs decline too and housing purchases are more affordable.…”