Lecture 12 Steegmans & Van Vlodrop

Question 1

What are the mechanisms of Decreasing house prices and household mobility?

Answer 1

ƒ Mechanisms: (nominal) loss aversion and negative equity

Question 2

ƒ Why do households not want to move and why are they not able to?

Answer 2

Psychological constraint vs. financial constraint

Question 3

When are studies biased about house prices and house mobility?

Answer 3

When (nominal) loss aversion and negative equity are not studied simultaneously

Question 4

Hazard rate:

Answer 4

ƒ Hazard rate: probability of selling/moving in a specific period,
conditional on having ‘survived’ (not having sold) until then.

Question 5

What are the three conlusions for household mobility?

Answer 5

ƒ Little evidence for lock-in effect of negative equity; only moderately underwater households have a lower mobility.
ƒ Higher mobility of heavily underwater households is not default-driven.
ƒ Therefore, households prefer not to move when prices decrease even if it is possible from a financial perspective.

Question 6

How to mitigate reluctance/inability to sell?

Answer 6

By Market Premiums

Question 7

…… should be reflected …….

Answer 7

Reluctance/inability to sell should be reflected in house prices.

Question 8

Prospective loss:

Answer 8

When the house value is smaller than purchasing price

Question 9

Underwater:

Answer 9

When the value of the mortgage is larger than the house value

Question 10

What are the three conclusions for house prices?

Answer 10

ƒ Prospective losses and negative equity do affect house prices.
ƒ Prospective losses have a larger effect on house prices than negative
equity.
ƒ Once again, loss aversion seems more important than equity
constraints (in the Netherlands)

Question 11

What are the four reasons to invest in real estate?

Answer 11

• Tangible asset value
• Stable returns
• Inflation hedging
• Low correlation with other categories

Question 12

What are four types of Real Estate investments?

Answer 12

1. Buying buildings
2. Participating in Joint Ventures
3. Non-listed funds
4. Listed funds

Question 13

What are four reasons to engage in Mergers and Acquisitions

Answer 13

1. Growth (Construction takes years, acquisitions months)
2. Scale economies (schaalvoordelen)
3. Critical mass (diversification, shock absorption, labour market visibility, relevance towards governments)
4. Acces to capital (cheaper debt, more equity pockets and a broader universe of financing instruments)

Question 14

What are the four steps of mergers and acquisitions?

Answer 14

1. Pioneers Venture Capital Private Equity
2. IPO (Initial Public Offering)
3. Listed Expansion
4. Consolidation