Real Estate Economics Flashcards
How long was the period of negative swiss policy rate?
7 years from 2015 - 2022
Since 2007 when was the first interest rate hike?
June 2022
Why do RE prices react later to a interest change? and what delay?
rents respond later, thus prices too
delay of approx. 1 year
What are the 4 submarkets?
- Asset market
- property market
- construction market
- building stock (Gebäudebestand)
What belongs in the asset market?
- Transactions
- interest rate development
- Real Estate specific risks
- returns
- regulation, mortgage lending, Lex Koller
What belongs in the property market?
- households
- population and employment
- migration
- surface consumption (Flächenbedarf)
- purchasing power, willingness to pay
What belongs in the construction market?
- construction and refurbisment (Renovierung)
- availability of land
- regulation, spatial planing (Raumplanung)
- construction costs
What belongs in the building stock (Gebäudebestand)?
- reactive market
- maintenance costs, depreciation
What are the effects on Ukraine crisis on Submarkets?
Asset market
- inflation -> interest rate increase -> higher prices
- real estate as a safe haven asset -> support prices
Property market
- immigration (refugees)
- higher demand for housing -> higher rents -> higher prices
Construction market
- higher energy prices -> increasing construction prices -> less construction -> higher prices
Building stock
- higher energy prices -> higher heating costs -> lower purchasing power for net rent
- increasing maintenance costs
What is the “Di Pascquale/ Wheaton 4 quadrant model”?
- modelling interaction between asset market, property market and construction markets
- determination of long run equilibrium
- elegant graphical representation
- allow to perform comparative statics
Di Pasquale/ Wheaton: What are the functional forms?
- Asset market
- Property market
- Construction market
- Building stock
Property market: is it elastic or in elastic?
It’s inelastic
-> if stock decreases, rent increases
(auf Preisänderungen wird nicht reagiert, da man ja irgendwo wohnen muss)
Asset market: what is the capitalization rate? And how is it used in the calculation?
- a percentage rate to calculate the income value from rental income
- Net income per year / Cap. rate
Asset market: What is decisive for an investment in RE?
- attractiveness of alternative investments (bonds, stocks)
- expectation of future developments
Construction markets: What drives construction prices?
cost of materials:
- construction materials
- energy
- labor costs
- further
Building Stock: there are five Stages of a RE according Life expectancy, can you tell me the stages?
- Prenatal < 1 year
- Childhood 1 - 16 years
- Adolescene 17 - 29 years
- Adulthood 30 - 49 years
- Old Age 50+ years
Di Pasquale / Wheaton: the goal is to draw the longrun equilibrium
Can you draw the Di Pasquale Model?
Di Pascale / Wheaton: What happens when interest rates drop? Draw it. Solution Short run.
Di Pascale / Wheaton: What happens when interest rates drop? Draw it. Solution Long run.
Interest rate cut -> what will happen to the following variables:
- transaction prices of multi-family units
- apartment construction activity
- stock of apartments
- rental prices of apartments at the time of interest rate cut
- rental prices of apartments after the lowering of interest rates (short-term adjustment)
- rental prices of apartments in the new equilibrium (long-term adjustment)
How many years will the adjustment process take?
- Multi-family units go up
- construction activity go up
- stock of apartmens go up
- rental prices of apartments at the time of the cut remains the same
- rental prices of apartments short-term go down
- rental prices of apartments long-run go down (but less than short run)
7 years takes the adjustment process
If 10-year Swiss government bond yields rise by 100 basis points, what chronological order would the individual segmens react?
- demand in property markets
- prices for investment properties
- discount rates
- reference interest rate
- construction market
- supply on property market
- discount rates
- prices for investment properties
- construction market
- supply on property market
- reference interest rate
- demand in property markets
Di Pasquale/ Wheaton: What would happen when population growth increases? in Shor run
Di Pasquale/ Wheaton: What would happen when population growth increases? in long run
how would following quantities evolve as a result of higher population growth:
- the rental prices of apartmens after one year
- the transaction prices of multifamily buildings
- the new construction activity of apartments
- the stock of apartments
- the rental prices of apartments after seven years
everything increases
Di Pasquale/ Wheaton: What happens when construction prices increase? Short run. draw it.
Di Pasquale/ Wheaton: What happens when construction prices increase? long run. draw it.
What are the strengths of Di Pasquale/ Wheaton model?
- model shows interaction of user market, capital and construction market
- suitable for determining long-term market equilibrium
- allows to analyse effects of shocks (interest rates, immigration, construction costs, depreciation)
- simple framework can explain various real world developments
What are the weaknesses of Di Pasquale/ Wheaton model?
- classical model does not allow analysis of short-term adjustment
- capitalization rate is exogenous (fremd)
- no role for vacancy rates or market expectations
- no distinction between rental and owner-occupied housing
- no modeling of the search and matching process between suppliers and demanders
What’s a interest rate and how do you calculate it?
interest rate is the consideration paid by a debtor to his creditor for granting a loan
Interest rate = risk-free interest rate + inflation risk + default risk
What are the determinants of interest rates?
- inflation (interest must compensate for loss of purchasing power of money, high inflation -> higher nominal interest rates)
- economy (GDP growth)
- investement pressure
- demography (increase in life expectancy -> reduces interest rates -> people want to save more for their retirement)
- monetary policy (achieve price stability)
-
What are the most important interest rates?
- SNB policy rate: rate, under which credit institution can borrow money from SNB
- SARON
- Yield on Swiss government bonds
What’s the current interest rate?
1.75%
how do you calculate the Yield to Maturity in %?
What drives government bond yields?
Yield = Expected economic growth
+ expedcted inflation
+ policy rate
+ financial market: investment pressure, risk aversion, savings vs investments
+ … other premiums, e.g. illiquidity
What happens in the event of an inflation shock?
- yields Confederation bonds
- policy rate
- prices of investment properties
- existing rents
- yields on confederation bonds ->rise
- policy rate ->rise
- prices of investment properties -> fall
- existing rents -> rise
What’s the typical sequence of an interest rate increase?
- Inflation shock
- bond yields rise (reflect future inflation expectations)
- SNB reacts with policy rate hike to fight inflation
- Yields on investment properties rise, prices fall
- Ownership property prices come under pressure
- reference interest rate increases
- existing rents rise due to reference interest rate and inflation pass-through
- construction activity declines due to falling real estate prices
- asking rents rise due to supply shortage
What’s decisive for investemtns in real estate?
- attractiveness of alternative investments (bonds, shares)
- expectations of future development
- investment pressure throughout the economy:
-> savings (supply for lending) versus investment opportunities (demand for loans)
-> dependent on strucural facotrs (demographics) and cyclical factors (business cycle)
