The Influence of Macroeconomic Conditions on the Property Market Development in the UK

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The dynamic model based on historical data for UK property development by Barras and Ferguson (1987a, 1987 b) establishes an endogenous development cycle mechanism. This model identifies the level of user activity and the level of investment activity as the two major economic factors affecting property cycles. This model, however, explicitly includes an endogenous cycle mechanism, which is problematic. Further, the homogeneity assumption for variables like rent, capitalization rates, building costs etc is also questionable. Several explanations based on irrational behaviour of valuers, developers and lenders like slowness of these agents to respond to clear market signals and failure to learn from experience are also given to property cycles (Baum and Crosby, 1995). However, these models implicitly assume irrational behaviour, which is its limitation. The model of property cycles and option pricing based on owners and developers (Grenadier, 1995) shows that the stickiness of vacancy rates increases with the rise in uncertainty and adjustment costs. Further, the probability of overbuilding rises with the rise in the construction period, adjustment costs and uncertainty about future demand. However, this model is based on the assumptions regarding preferences in finance theory, which is unlikely to hold good in property markets. This reduces the predictability of the model (Ball et al.1998). Thus all the models discussed above have some shortcomings. Their predictability cannot be generalized and depends upon the context only.