ISSN (Print) 0473-453X

Discussion Paper No. 1225

ISSN (Online) 2435-0982

REAL ESTATE MARKET

Charles Ka Yui Leung

December 2023

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Real Estate Market

Charles Ka Yui LeungThis version: December 2023

Abstract
This short article provides a quick summary of the studies of real estate markets. Some newdevelopments are also discussed.

Keywords: centralized versus decentralized markets; search-theoretic models; match; policy

JEL classification Number: D80, R20, R30

Acknowledgement: This article is prepared for The World of Regional Science, edited byPeter Nijkamp, Karima Kourtit, Kingsley Haynes and Zeynep Elburz, to be published by EdwardElgar. I am very grateful to many colleagues who shaped my thoughts on the topic, especially Paul
Anglin, Nan-Kuang Chen, Yifan Gong, Rick Hanushek, Steve Malpezzi, Francois Ortalo-Magne,
Tim Riddiough, Edward Tang, Chung Yi Tse, Kuzey Yilmaz, among others. The usual disclaimer
applies.
Department of Economics and Finance, City University of Hong Kong, Kowloon Tong, HongKong. kycleung@cityu.edu.hkReal Estate Market

1. Definition
According to the Cambridge Dictionary, “market” has different meanings. It may be“the business or trade in a particular product, including financial products.” It may also be“a place or event at which people meet in order to buy and sell things.”(https://dictionary.cambridge.org/dictionary/english/market). Thanks to technologicaldevelopment, the financial market can be an electronic platform for trading financial assets. For
instance, the stock exchange often serves as a "clearing house" where buyers and sellers tradeapproximately equal prices.
On the other hand, there is hardly any platform where people can gather to trade real estate.
Instead, buyers search on their behalf and often in an uncoordinated manner. In other words, thereal estate market is often decentralized.
2. History
Notice that the real estate market might have changed less than we thought. According to Temin(2013, p.139), the “market for land in the Roman Empire worked approximately like the landmarket today.” After reviewing the archeological evidence, Sartre (2005, p.181) concludes that“all generalizations, whether about houses or urban development, can be misleading, and local
tradition was very important in this realm.” Why is that? Real estate may be heterogeneous. For
one thing, locations are different. The nearby environment can also be different, potentiallyshaped by cultural and historical factors.
3. Theory
While the decentralized feature of the real estate market has long been recognized, theformalization of the idea comes later. Wheaton (1990) is perhaps the first search-theoretic
equilibrium theory of the real estate market. In that model, the vacancy rate and the house priceare determined endogenously, i.e., within the model.
Since search-theoretic models (STM) are often technically involved, we only provide an outline
here. Recall that the real estate market is decentralized. Moreover, real estate is durable. Hence,each agent needs to evaluate different options, considering all possible futures. They are called
the Bellman equations, constituting the first set of equations in a typical STM. For instance, abuyer needs to consider the probability of successfully finding a match and conditioning on that,what price would be acceptable, and how much utility will be generated. The buyer must also
consider the probability of the failure to find a match and its implications for the agent's utility.
A similar calculation also takes place in each seller's mind. Suppose different options areavailable for a sub-group, such as some who could choose to rent or own. In that case, the modelneeds to ensure that different options would provide the same level of utility (or "pleasure") inequilibrium.

The second set of equations in an STM relates all the probabilities that we mentioned above tothe ratio of vacant real estate units to the number of people actively involved in the market. Forinstance, from a buyer's perspective, the chance of finding a match would depend on how manypotential buyers are in the market relative to the number of vacant real estate units available,often labeled as the "market thickness." A parallel calculation occurs on the seller's side.
The last set of equations in an STM is about accounting. For instance, the number of potential
buyers in the market in the next period would depend on the difference between how manybuyers find a match and the number of households that start a new house search. We also need tokeep track of the evolution of the physical units of real estate, which might change due todepreciation or new construction.
We say the model is in equilibrium when all equations are simultaneously satisfied.
4. Conceptualisation
We should distinguish different kinds of markets. While "wet markets" and "farmer markets"
often refer to some physical place, real estate markets are not. Real estate markets refer to thesearch-to-trade and actual real estate trading. The real estate market is a market without aspecific marketplace.
5. New developments
There are many developments in the studies of the real estate market. Limited by the space, only
a few are highlighted here. First, unlike financial assets, which can be transacted quickly, realestate often takes a long time to complete. Hence, researchers jointly study the transaction timeand prices (Anglin and Wiebe, 2013). Second, people may purchase housing units in an area withcomplicated motives, such as access to quality education (Hanushek and Yilmaz, 2022). Third,
central banks may be involved in trading real estate-related assets, potentially distorting theprices (Hattori and Yoshida, 2022). Fourth, real estate can be used as an income hedge, andhence, the equilibrium housing affordability could be a subtle issue (Ortalo-Magné and Prat,2014). Fifth, people can speculate on real estate (Leung and Tse, 2017). Sixth, real estate can besecuritized and become a part of the retirement package (Riddiough, 2022).
6. Policy relevanceThe studies of the real estate market are critical. For instance, housing affordability is a global
issue, and real estate market research can illuminate the discussion (Saiz, 2023).
7. Application fields
Real estate market research has been embedded in labor, macro, and international economics
models.
8. ProspectWith increasing available granular data, one would explore more issues in real estate markets.

Reference
Anglin, P. and Wiebe, R. (2013). Pricing in an Illiquid Real Estate Market, Journal of Real
Estate Research, 35, 83-102.
Hanushek, E. and Yilmaz, K., (2022). Residential location and education in the United States.
Chpt 5, in C. K. Y. Leung ed., Handbook of Real Estate and Macroeconomics, Edward Elgar,Northampton, M.A., USA.
Hattori, T. and Yoshida, J. (2022). The Bank of Japan as a Real Estate Tycoon: Large-Scale
REIT Purchases, chpt 2., in C. K. Y. Leung ed., Handbook of Real Estate and Macroeconomics,
Edward Elgar, Northampton, M.A., USA.
Leung, C. K. Y. & Tse, C. Y. (2017). Flipping in the housing market, Journal of Economic
Dynamics and Control, 76, 232-263.
Ortalo-Magné, F. and Prat, A. (2014). On the Political Economy of Urban Growth:Homeownership versus Affordability, American Economic Journal: Microeconomics, 6(1), 154181.
Riddiough, T. (2022). Pension Funds and Private Equity Real Estate: History, Performance,
Pathologies, Risks, chpt 15, in C. K. Y. Leung ed., Handbook of Real Estate andMacroeconomics, Edward Elgar, Northampton, M.A., USA.
Saiz, A. (2023). The Global Housing Affordability Crisis: Policy Options and Strategies, mimeo.
Sartre, M. (2005). (translated by C. Porter and E. Rawlings) The Middle East under Rome,Cambridge: Harvard University Press.
Temin, P. (2013). The Roman Market Economy, Princeton: Princeton University Press.
Wheaton, W. (1990). Vacancy, Search, and Prices in A Housing Market Matching Model,
Journal of Political Economy, 98(6), 1270-1292.