Title: Commercial real estate, housing and the business cycle
Authors: Kostas Vasilopoulos - Lancaster University Management School (United Kingdom) [presenting]
William Tayler - Lancaster University (United Kingdom)
Abstract: The 2007-08 financial crisis exposed the magnitude in which real estate markets and the construction sector can spillover to goods market, and the real sector. The aim is to develop a two-sector RBC model, consumption good and a construction sector, where both commercial and residential real estate forms the construction sector. We introduce income-producing real estate in a model with housing to investigate the property-price and investment dynamics, and their implications to the macroeconomic fluctuations. We allow for common characteristics for commercial and residential real estate production, where the inputs of technology, capital, and labor have the same structure and are determined separately. Whilst we treat the production of real estate independently they share risks, and they compete for their final input, land, which is fixed on aggregate. The borrowing capacity of the entrepreneurs is constrained by the value of their collateral assets, where they differ depending on the type of assets available in each sector. We show that a housing demand shock generates a complementarity effect between commercial and residential real estate. However, the degree of complementarity depends on the land regime i.e. land regulations that determine the substitutability of residential and commercial land (e.g. zoning and land use). Policies that focus on land allocations can mitigate this effect and thus restrict the amount of spillover to the real economy.