The Behaviour of Housing Developers and Aggregate Housing Supply

NBP Working Paper No. 206

37 Pages Posted: 12 Aug 2015

See all articles by Jacek Laszek

Jacek Laszek

Warsaw School of Economics (SGH)

Krzysztof Olszewski

Narodowy Bank Polski

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2015

Abstract

The article presents an theoretical analysis of the developer sector, which bases on the observed functioning of the market. We explain the behaviour of developers in the short and medium run and show why they add to the creation of a real estate bubble instead of mitigating it. The bubbles result from the interactions between housing developers who keep high prices and households, who increase housing demand even if house prices rise. The housing developer, due to the asymmetry of information, is able to take advantage of a local monopoly and differentiate prices. This allows him to sell apartments of a similar construction to each client at a different price, thanks to which he maximizes profits. However, when the developer overestimates demand or the competition gets tougher, his production costs grow and the possibility to differentiate prices is reduced. This has a direct impact on the profits that he can generate. The consequence of this phenomenon is a more flexible ex post curve of developer supply. As a result, there is a tendency to overproduction in the developer sector, which deepens the cyclical nature of the housing market.

Keywords: Real and virtual supply curve, monopolistic competition, price discrimination, acceleration of demand, overproduction

JEL Classification: O18, M2, R31

Suggested Citation

Laszek, Jacek and Olszewski, Krzysztof, The Behaviour of Housing Developers and Aggregate Housing Supply (May 1, 2015). NBP Working Paper No. 206. Available at SSRN: https://ssrn.com/abstract=2642756 or http://dx.doi.org/10.2139/ssrn.2642756

Jacek Laszek

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Krzysztof Olszewski (Contact Author)

Narodowy Bank Polski ( email )

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