Making sense of an unpredictable real estate market
May 25, 2017
Business Economics researchers strive to predict future trends and purchasing behaviours in real estate
Though many of us feel extremely lucky to call Toronto home, the actual process of buying property in this city can be daunting.
In fact, city dwellers across North America are all-too familiar with the rise of tense bidding wars, unrealistic asking prices and skyrocketing property values. Whether you own property, hope to own one day or are happy renting, everyone is impacted by today’s unpredictable housing market.
This is why researchers at the Rotman School of Management, including Petro-Canada Associate Professor in Business Economics Lu Han, are developing new models that could provide important insights on where this market is headed.
“Real estate is completely different from all other assets. Unlike other financial assets, real estate serves many functions. For buyers, a home is not just an investment, but a resource that they cannot live without.”
—Lu Han, Petro-Canada Associate Professor in Business Economics
“This is a very capital-intensive business, so there is a lot of wealth at stake. Human emotion and behaviour can drastically influence prices. Also, many individuals and institutions — including lenders, appraisers, real estate brokers, governments at all levels, secondary mortgage markets and REITs — play important roles.”
Adding to this complexity, there is still much we don’t know when it comes to real estate. Properties can vary drastically in size, architecture and location, so comparing the average property values for a particular city, from year to year, doesn’t offer much information, says Han.
Instead, what’s needed is more complex real estate data, so that researchers can develop an index to correct for discrepancies and evaluate whether prices are fluctuating and if purchasing behaviours are changing. At Rotman, Han and her colleagues are studying a number of dimensions of North America’s complex real estate market.
For instance, Han and Professor William Strange published a paper in Real Estate Economics that explains the emergence — and persistence — of bidding wars in the U.S. and Canada.
Adding to this work, Han combed through survey data of recent home buyers in a major North American metropolitan area and went on to develop a model to explain the changing role of the asking price in residential real estate.
“Thirty years ago, 90 per cent of American homes were sold below asking price,” says Han. “Today, about a third of new home owners buy their home through bidding wars — and a lot of homes are sold above the advertised price.”
In a paper published in the Journal of Urban Economics, Han confirmed that the asking price is increasingly used as a tool to attract more potential buyers and incite bidding wars.
Han has also published work on housing boom and bust cycles, the search, bargaining and brokerage stages of home buying and explained how, when home buyers and sellers are represented by the same brokerage firm, both parties might lose out. Right now, she is examining the impact of recent mortgage policies in Canadian housing markets.
“No one can say with certainty what the next year’s housing prices will be. By collecting more data, we can better understand what is going in the real estate market,” says Han.