PRE-CRISIS DEVELOPMENTS IN THE HUNGARIAN HOUSING

MARKET;A MODEL WITH QUALITY

DIFFERENTIALÁron Horváth – János Vincze

Helmut Schmidt University – HamburgReal Estate Forecasting Workshop

November 24., 2011.

CONTENTS1. Overview of the Hungarian

residential real estate market. 2. The paper

2.1. The observation: quality differential

2.2. The model2.3. Impulse responses2.4. Calibration strategy

Overview of the Hungarian residential

real estate market

1.1. HOUSING MARKET IN THE SOCIALIST ERA – UNTIL 1989

One family – one flat rule. Few available investment assets. Unprofessional (governmental or

family built) construction industry - low quality homes.

1.2. HOUSING MARKET IN THE NINETIES

Mass amount of privatized flats. The flats were of deteriorated quality. Lack of credit market. Low supply and

demand also.

HOUSING MARKET AFTER THE MILLENNIUMThree pillars of the

change Overall economic

and financial stabilization.

More professional construction industry.

Huge governmental subsidy system.

HOUSING MARKET DURING THE CRISIS The crisis hit the Hungarian economy

severely. Three channels of the effect:

Decreasing income of households. Diminishing credit supply: banks had to

deal with their problem on the liability side.

Almost disappearing governmental subsidies because of the financial consolidation.

The prospects are still not very good.

The paper: a model with quality differential

OBSERVATION 1-2.

OBSERVATION 3! price of more expensive homes relative to the typical (median) home price

MODEL simple framework:

endogenous variables: price, quantity dynamic structure: lagging supply duplication by quality level: „good”

quality homes and „bad” quality homes

DEMAND Budget constraint

income wealth consumption expenditure

Quadratic utility function

SUPPLY Profitmaximizing company with

adjustment costs

Supply functions

THE DYNAMIC SYSTEM 6 equations

6 variables

SIMULATION: INCREASING INCOME

SIMULATION: INCREASING INCOME It explains the rise in house prices and

the construction boom. But its effect on relative prices is

positive.

SIMULATION: QUALITY SHORTAGE Anecdotical evidence on quality

shortage could explain the relative price pattern.

CALIBRATION STRATEGY I.(STEADY STATE) amortization parameters: technical

values. interest rate: expected yield of the

worse homes. supply parameters: based on the

relative price of the two kinds of flats transition parameter from good to worse

homes: expected yield of better homes

CALIBRATION STRATEGY II.(DYNAMICS)

adjustment cost parameters:To replicate the one and a half years’

reaction of the construction industry demand parameters: demand

elasticity characteristics in the distinct groups

income parameters: quadratic structure is narrow, other specifications should be applied

Thanks for your attention!

horvathar@eltinga.hu