Dynamic modeling of Shenzhen's real estate market : understanding the oscillation and trend

Abstract

This thesis studies the causes of long term market oscillations in real estate markets. It tries to answer the question whether Shenzhen's real estate property prices are driven by speculation and will experience "chronic cyclical instability" as seen in many other markets (Sterman, 2000). The real estate model introduced in this paper extends John Sterman's Commodity Model to accommodate the durable nature of real-estate, and introduces features of price speculation. The model is tested and calibrated against California housing market data from 1980 to 2014, and then applied to Shenzhen's real estate market data from 2002 to 2012. Simulation results show a good match between simulated output and historical records for California, both when speculation is included and when it is omitted. This model suggests that speculative demand is not actively linked to price trends, and that the repeated oscillation in price and construction is consistent with chronic instability caused by long delays in construction capacity development and fast price hill-climbing process. Speculation's influence on price and construction overshoot and undershoot is minimal. Analyzing Shenzhen's market behavior through this model reveals that government regulations intended for controlling real estate speculation activities actually contributed to market instability. Demonstrating the dynamics of policy resistance, the "unutilized land fee" that intended to speed up the supply of building space to market in fact drove developers to slow down construction, so they could capture gains from rising prices. Government limits on the release of undeveloped land, intended to suppress speculative investment, in fact enabled the dynamic for a long rally in price and slowed construction at the same time. Shenzhen's real estate is expected to experience oscillations in the coming decade just like other regions' markets.