Áron Horváth – János Vincze Helmut Schmidt University – Hamburg Real Estate Forecasting Workshop November 24., 2011.

1. Overview of the Hungarian residential real estate market. 2. The paper 2.1. The observation: quality differential 2.2. The model 2.3. Impulse responses 2.4. Calibration strategy

Overview of the Hungarian residential real estate market

 One family – one flat rule.  Few available investment assets.  Unprofessional (governmental or family built) construction industry - low quality homes.

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

Three pillars of the change  Overall economic and financial stabilization.  More professional construction industry.  Huge governmental subsidy system.

 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

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

 simple framework: endogenous variables: price, quantity  dynamic structure: lagging supply  duplication by quality level: „good” quality homes and „bad” quality homes

 Budget constraint income wealth consumption expenditure  Quadratic utility function

 Profitmaximizing company with adjustment costs  Supply functions

 6 equations  6 variables

 It explains the rise in house prices and the construction boom.  But its effect on relative prices is positive.

 Anecdotical evidence on quality shortage could explain the relative price pattern.

 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

 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!