Real Estate Economics

Question 1

How long was the period of negative swiss policy rate?

Answer 1

7 years from 2015 - 2022

Question 2

Since 2007 when was the first interest rate hike?

Answer 2

June 2022

Question 3

Why do RE prices react later to a interest change? and what delay?

Answer 3

rents respond later, thus prices too
delay of approx. 1 year

Question 4

What are the 4 submarkets?

Answer 4

1. Asset market
2. property market
3. construction market
4. building stock (Gebäudebestand)

Question 5

What belongs in the asset market?

Answer 5

• Transactions
• interest rate development
• Real Estate specific risks
• returns
• regulation, mortgage lending, Lex Koller

Question 6

What belongs in the property market?

Answer 6

• households
• population and employment
• migration
• surface consumption (Flächenbedarf)
• purchasing power, willingness to pay

Question 7

What belongs in the construction market?

Answer 7

• construction and refurbisment (Renovierung)
• availability of land
• regulation, spatial planing (Raumplanung)
• construction costs

Question 8

What belongs in the building stock (Gebäudebestand)?

Answer 8

• reactive market
• maintenance costs, depreciation

Question 9

What are the effects on Ukraine crisis on Submarkets?

Answer 9

Asset market
- inflation -> interest rate increase -> higher prices
- real estate as a safe haven asset -> support prices

Property market
- immigration (refugees)
- higher demand for housing -> higher rents -> higher prices

Construction market
- higher energy prices -> increasing construction prices -> less construction -> higher prices

Building stock
- higher energy prices -> higher heating costs -> lower purchasing power for net rent
- increasing maintenance costs

Question 10

What is the “Di Pascquale/ Wheaton 4 quadrant model”?

Answer 10

• modelling interaction between asset market, property market and construction markets
• determination of long run equilibrium
• elegant graphical representation
• allow to perform comparative statics

Question 11

Di Pasquale/ Wheaton: What are the functional forms?
- Asset market
- Property market
- Construction market
- Building stock

Answer 11

Question 12

Property market: is it elastic or in elastic?

Answer 12

It’s inelastic
-> if stock decreases, rent increases
(auf Preisänderungen wird nicht reagiert, da man ja irgendwo wohnen muss)

Question 13

Asset market: what is the capitalization rate? And how is it used in the calculation?

Answer 13

• a percentage rate to calculate the income value from rental income
• Net income per year / Cap. rate

Question 14

Asset market: What is decisive for an investment in RE?

Answer 14

• attractiveness of alternative investments (bonds, stocks)
• expectation of future developments

Question 15

Construction markets: What drives construction prices?

Answer 15

cost of materials:
- construction materials
- energy
- labor costs
- further

Question 16

Building Stock: there are five Stages of a RE according Life expectancy, can you tell me the stages?

Answer 16

1. Prenatal < 1 year
2. Childhood 1 - 16 years
3. Adolescene 17 - 29 years
4. Adulthood 30 - 49 years
5. Old Age 50+ years

Question 17

Di Pasquale / Wheaton: the goal is to draw the longrun equilibrium
Can you draw the Di Pasquale Model?

Answer 17

Question 18

Di Pascale / Wheaton: What happens when interest rates drop? Draw it. Solution Short run.

Answer 18

Question 19

Di Pascale / Wheaton: What happens when interest rates drop? Draw it. Solution Long run.

Answer 19

Question 20

Interest rate cut -> what will happen to the following variables:
- transaction prices of multi-family units
- apartment construction activity
- stock of apartments
- rental prices of apartments at the time of interest rate cut
- rental prices of apartments after the lowering of interest rates (short-term adjustment)
- rental prices of apartments in the new equilibrium (long-term adjustment)

How many years will the adjustment process take?

Answer 20

• Multi-family units go up
• construction activity go up
• stock of apartmens go up
• rental prices of apartments at the time of the cut remains the same
• rental prices of apartments short-term go down
• rental prices of apartments long-run go down (but less than short run)

7 years takes the adjustment process

Question 21

If 10-year Swiss government bond yields rise by 100 basis points, what chronological order would the individual segmens react?
- demand in property markets
- prices for investment properties
- discount rates
- reference interest rate
- construction market
- supply on property market

Answer 21

1. discount rates
2. prices for investment properties
3. construction market
4. supply on property market
5. reference interest rate
6. demand in property markets

Question 22

Di Pasquale/ Wheaton: What would happen when population growth increases? in Shor run

Answer 22

Question 23

Di Pasquale/ Wheaton: What would happen when population growth increases? in long run

Answer 23

Question 24

how would following quantities evolve as a result of higher population growth:
- the rental prices of apartmens after one year
- the transaction prices of multifamily buildings
- the new construction activity of apartments
- the stock of apartments
- the rental prices of apartments after seven years

Answer 24

everything increases

Question 25

Di Pasquale/ Wheaton: What happens when construction prices increase? Short run. draw it.

Answer 25

Question 26

Di Pasquale/ Wheaton: What happens when construction prices increase? long run. draw it.

Answer 26

Question 27

What are the strengths of Di Pasquale/ Wheaton model?

Answer 27

- model shows interaction of user market, capital and construction market - suitable for determining long-term market equilibrium - allows to analyse effects of shocks (interest rates, immigration, construction costs, depreciation) - simple framework can explain various real world developments

Question 28

What are the weaknesses of Di Pasquale/ Wheaton model?

Answer 28

- classical model does not allow analysis of short-term adjustment - capitalization rate is exogenous (fremd) - no role for vacancy rates or market expectations - no distinction between rental and owner-occupied housing - no modeling of the search and matching process between suppliers and demanders

Question 29

What's a interest rate and how do you calculate it?

Answer 29

interest rate is the consideration paid by a debtor to his creditor for granting a loan Interest rate = risk-free interest rate + inflation risk + default risk

Question 30

What are the determinants of interest rates?

Answer 30

- inflation (interest must compensate for loss of purchasing power of money, high inflation -> higher nominal interest rates) - economy (GDP growth) - investement pressure - demography (increase in life expectancy -> reduces interest rates -> people want to save more for their retirement) - monetary policy (achieve price stability)

Question 31

# - What are the most important interest rates?

Answer 31

- SNB policy rate: rate, under which credit institution can borrow money from SNB - SARON - Yield on Swiss government bonds

Question 32

What's the current interest rate?

Answer 32

1.75%

Question 33

how do you calculate the Yield to Maturity in %?

Answer 33

Question 34

What drives government bond yields?

Answer 34

Yield = Expected economic growth + expedcted inflation + policy rate + financial market: investment pressure, risk aversion, savings vs investments + ... other premiums, e.g. illiquidity

Question 35

What happens in the event of an inflation shock? - yields Confederation bonds - policy rate - prices of investment properties - existing rents

Answer 35

- yields on confederation bonds ->rise - policy rate ->rise - prices of investment properties -> fall - existing rents -> rise

Question 36

What's the typical sequence of an interest rate increase?

Answer 36

1. Inflation shock 2. bond yields rise (reflect future inflation expectations) 3. SNB reacts with policy rate hike to fight inflation 4. Yields on investment properties rise, prices fall 5. Ownership property prices come under pressure 6. reference interest rate increases 7. existing rents rise due to reference interest rate and inflation pass-through 8. construction activity declines due to falling real estate prices 9. asking rents rise due to supply shortage

Question 37

What's decisive for investemtns in real estate?

Answer 37

- attractiveness of alternative investments (bonds, shares) - expectations of future development - investment pressure throughout the economy: -> savings (supply for lending) versus investment opportunities (demand for loans) -> dependent on strucural facotrs (demographics) and cyclical factors (business cycle)