Rational Expectations? A Time-Series Analysis of Building Booms in the London Office Market

19 Pages Posted: 17 Nov 2010 Last revised: 30 Jun 2011

See all articles by Franz Fuerst

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Anna-Maija Grandy

affiliation not provided to SSRN

Date Written: November 16, 2010

Abstract

Expectations of future market conditions are generally acknowledged to be crucial for the development decision and hence for shaping the built environment but there appears to be no consensus in the literature on what exactly constitutes rational behaviour of individual developers. This paper outlines the rationality conundrum that developers face when trying to anticipate their competitors’ knowledge and behaviour. Keeping in mind these limitations, we then test empirically for evidence of rational versus adaptive and naive expectations in the Central London office market from 1987 to 2009. Applying VAR models and a recursive OLS regression with one-step forecasts, we do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, our results confirm that developer decisions are explained to a large extent by contemporaneous and historic conditions in both the City and the West End but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.

Suggested Citation

Fuerst, Franz and Grandy, Anna-Maija, Rational Expectations? A Time-Series Analysis of Building Booms in the London Office Market (November 16, 2010). Available at SSRN: https://ssrn.com/abstract=1710232 or http://dx.doi.org/10.2139/ssrn.1710232

Franz Fuerst (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

Anna-Maija Grandy

affiliation not provided to SSRN ( email )

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