Asymmetric Patterns of Demand-Supply Mismatch in Real Estate

Abstract

As expectations change, we may observe asymmetry in responses of economic agents over various phases of the economic cycles. In this paper, we analyze both demand and supply side information to understand the dynamics of price determination in the real estate market and examine the relationship between expectation parameters and demand-supply mismatch. Our hypothesis builds on the possibility that investors’ call for action in terms of their buy/sell decision and adjustment in reservation prices may provide valuable insights into impending demand-supply imbalances in the market. We study several real estate sectors to inform our analysis. The timeframe of our analysis (1995–2010) allows us to observe market dynamics over several economic cycles. We test our hypothesis variously using several measures of market activity within a structural panel VAR framework. Our analysis suggests that investors’ attitude may have substantial and statistically significant feedback effects in price determination. These results indicate noticeable asymmetry in responses during the boom, normal and recessionary periods.