Abstract for: Real Estate Cycles: A Theory Based on Stock-Flow Structure of Durable Goods Markets

In this paper by means of a simple system dynamics model, we have addressed a cycle-producing mechanism in the owner-occupied real estate market which has not been discussed in the real estate economics literature before. This mechanism is based on accumulation of supply and demand which arises from specific stock-flow structure of a durable goods market like the owner-occupied market. Comparison between our model and a famous model of rental market (Wheaton, 1999) shows that despite the rental market, in the owner-occupied market an increase in durability of buildings leads to more intensive oscillations. Also the effect of price elasticity of supply on the cycles in the owner-occupied market is much more complex than that of the rental market. Furthermore a model integrating the two markets is developed. Model analysis reveals that the interrelations between the two markets make the effect of some parameters on the rental market cycles different from what is suggested by the rental market model. Our work uncovers the rich dynamic complexity of the real estate system and can serve as a good example of applying systems thinking principles to complex real world problems. Keywords: Real Estate Cycles; Owner Occupied Market; Durable Goods; Cycle-Producing Mechanism (CPM); Dynamic Complexity; System Dynamics Modeling.