1. Application of system dynamics modeling in real estate market analysis
Konrad Zelazowski, MSc
Department of Investment and Real Estate
University of Lodz
tel.: (+48)(42)

2. Classic models of real estate markets
They do not account for the time factor (time course of adjustment processes)
They do not reflect complex interrelations between the variables and processes (feedback, short- and long-term relationships)
Their potential for modification and expansion is limited.

3. System Dynamics Society
“System dynamics is a methodology for studying and managing complex feedback systems, such as one finds in business and other social systems.”
System Dynamics Society

4. System dynamics consists of the following research stages:
Identifying the problem
Putting forth a research hypothesis
Constructing a model simulating the functioning of the selected system
Verifying the correctness of the model and determining the extent to which it reflects reality
Conducting simulations of the system’s functioning in order to verify the proposed hypotheses
Drawing conclusions or selecting the optimum solution

5. Building blocks used in system dynamics modeling:
Stocks
Flows (inflows, outflows)
Converters
Connectors

6. Residential market model

7. Equations: Price(t) = Price(t - dt) + (Price_adjustments) * dt
INIT Price = 2000
INFLOWS:
Price_adjustments = (Optimum_price-Price)/Time_delays_in_price_adjustments
Stock_of_available_real_estate(t) = Stock_of_available_real_estate(t - dt) + (Construction - Sales) * dt
INIT Stock_of_available_real_estate = Optimum_stock_of_available_real_estate
Construction = HISTORY(Supply_of_new_real_estate,TIME-Supply_delay)
OUTFLOWS:
Sales = Total_real_estate_demand
Consumption_demand = ( *Price)*Demand_disturbances
Disproportion_in_real_estate_stock = Stock_of_available_real_estate/Optimum_stock_of_available_real_estate
Optimum_price = Influence_of_stock_disproportion_on_price*Price
Optimum_stock_of_available_real_estate = Total_real_estate_demand
Speculation = 4
Speculative_demand = (Price-HISTORY(Price,TIME-1))*Speculation
Supply_delay = 0
Supply_of_new_real_estate = *Price
Time_delays_in_price_adjustments = 1
Total_real_estate_demand = Consumption_demand+Speculative_demand
Demand_disturbances = GRAPH(TIME)
(1.00, 1.00), (2.40, 1.00), (3.80, 1.00), (5.20, 1.00), (6.60, 1.50), (8.00, 2.00), (9.40, 2.00), (10.8, 2.00), (12.2, 2.00), (13.6, 2.00), (15.0, 2.00)
Influence_of_stock_disproportion_on_price = GRAPH(Disproportion_in_real_estate_stock)
(0.00, 1.95), (0.2, 1.60), (0.4, 1.42), (0.6, 1.16), (0.8, 1.10), (1.00, 1.00), (1.20, 0.67), (1.40, 0.54), (1.60, 0.29), (1.80, 0.2), (2.00, 0.12)

8. The demand side: Consumption demand as a decreasing function of price.
Speculative demand as a function of real estate price changes.
Demand disturbances, a variable representing positive and negative demand shocks.

9. The supply side: Available real estate stock.
Supply of new real estate.
Optimum stock of available real estate.
Disproportion in the real estate stock.

10. Mechanism of price adjustments:
Current real estate price level.
Optimum price.
Influence of stock disproportion on prices.
Time delays in price adjustments.

11. Market behaviour simulations
Scenario assumes that after 5-period equilibrium, real estate market experiences a rapid increase in consumption demand for housing units

12. Classic model S
Price D’ D
Quantity

13. Price adjustment path in the case of a demand shock without time delays in the reaction of supply side No speculative investments

14. Price adjustment path in the case of a demand shock without time delays in the reaction of supply side Speculative investments appear

15. Price adjustment path in the case of a demand shock with time delays in the reaction of supply side (4 period delay) No speculative investments

16. Price adjustment path in the case of a demand shock with time delays in the reaction of supply side (4 period delay) Speculative investments appear

17. Market reaction on the positive demand shock

18. Conclusions
the occurrence of time delays in market mechanism reactions prolong the process of forming a new market equilibrium
supply-side time delays lead to a stronger price reaction in the initial phase of market adjustment
price fluctuations in market mechanism adjustment are additionally reinforced by speculative investments

19. Summary
System dynamics is an effective approach to the modeling of complex systems. It allows to construct detailed models of economic reality by incorporation of quantitative and qualitative data. Due to its unquestionable advantages system dynamics should be considered as a useful tool in education and real-life applications.