The European Real Estate Society 2013 report “conclude that prices fall to much in a bust”

The housing market seems to be prone to booms and busts.

For example, Ireland, Spain, the UK and the US all experienced booms over the 10 year period prior to 2007,
which then turned to busts. In Ireland prices rose by a factor of four, before then  halving again between 2007 and 2012 (according to the Economist’s interactive guide  to the world’s housing market).

The boom-bust cycle of the housing market (and other asset markets) can be  attributed to the important role played by expected capital gains in determining the  expected rate of return. When calculating the expected capital gain, participants tend  to focus on past performance as a measure of expected future performance. This  tendency to extrapolate price trends naturally leads to overshooting (i.e., prices rise  too much in a boom).When the sentiment shifts and participants start expecting price  declines, the market again overshoots (i.e., prices fall too much in a bust).

The accepted peer-review papers, stemming from the areas “Corporate Real Estate Management” – “Housing Markets & Economics” – “Finance & Investment” have been published in a separate volume – Book of Proceedings [PDF – approx. 15 Mb]

Three  special features of the housing market make it particularly prone to booms and busts.

First, it is hard to determine the fundamental value of houses, since each house is
different.

Second, supply of housing is fixed in the short run. Hence any changes in demand can translate into
large price movements, which then build their own momentum as market participants
then start extrapolating the trend.

Third, mortgage lending standards become laxer  during a boom since banks have more deposits to invest and are less concerned about
defaults. This process reverses in a bust. To the extent that home buyers feel credit  constrained (particularly first home buyers), these procyclical fluctuations in lending  standards act to accentuate the boom-bust cycle.

The European Real Estate Society (ERES) was established in 1994 to  create a structured and permanent network between real estate academics and professionals across Europe. ERES is dedicated to promoting and advancing the field of real estate research throughout  Europe. Incorporating many national property research societies, academic researchers and real estate practitioners, our activities,  such as the annual conference,  the industry seminars, education  seminars and publications provide  a forum for information flow and
debate on research issues. ERES  is a non-profit organisation affiliated with the International Real Estate Society, an organisation giving us an even wider contact base  in real estate.