The Role of Speculation in Real Estate Cycles

44 Pages Posted: 27 Mar 2015

See all articles by Stephen Malpezzi

Stephen Malpezzi

University of Wisconsin at Madison

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: June 18, 2002

Abstract

Our study investigates the role of speculation in real estate cycles. We find that even a simple model of lagged supply response to price changes and speculation is sufficient to generate real estate cycles. Second, the volatility of prices – the biggest purported downside of “speculation” – is strongly related to supply conditions. Even more interestingly, the effect of speculation itself depends on supply conditions. Markets with more responsive regulatory environments, or less natural constraint (from physical geography), will experience less volatility as well as less behavior characterized as speculation. Demand conditions in general, and speculation in particular, can contribute to a boom and bust cycle in housing and real estate markets – but the effects of speculation appear to be dominated by the effect of the price elasticity of supply. In fact, the largest effects of speculation are only observed when supply is inelastic. Thus effective policies will focus on improving the efficiency of the supply of developable land, and real estate generally, including the development of an appropriate regulatory framework for real estate.

Keywords: Cycles, Speculation, Asset Pricing, Expectations

Suggested Citation

Malpezzi, Stephen and Wachter, Susan M., The Role of Speculation in Real Estate Cycles (June 18, 2002). Available at SSRN: https://ssrn.com/abstract=2585241 or http://dx.doi.org/10.2139/ssrn.2585241

Stephen Malpezzi (Contact Author)

University of Wisconsin at Madison ( email )

5257 Grainger Hall
Madison, WI 53706
United States
608-262-6007 (Phone)
608-263-0477 (Fax)

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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