No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
UK commercial property investment: time-series characteristics and modelling strategies
Abstract
Modelling of UK commercial property development has been a growth industry in recent years. This paper examines the time series characteristics of the data on commercial output and considers the fruitfulness of modelling strategies with respect to it. The models estimated here make sense, and highlight the importance changes in national income, property values and construction costs in determining changes in commercial output. However, several technical and theoretical reasons suggest that they are likely to have poor forecasting ability. One reason is the data on commercial output have a low volatility, while the orders data are of poor accuracy and so are a bad substitute. Doubt is expressed over whether future econometric models can improve on this situation.
... These events have been repeatedly explained in the literature as phases of an autonomous price cyclical movement. Most of the existing literature on UK property cycles focusses on property investment cycles and commercial cycles in prices and building output (McGough and Tsolacos, 1995;RICS, 1994RICS, , 1999Barras, 2005;Ball and Grilli, 1997). Several studies, however, have investigated the residential price cycle for different countries, including the UK, but such conclusions are not country specific (Bracke, 2013;Angello and Schuknecht, 2011;Jaeger and Schuknecht, 2007); rather, they reflect generalised findings of cyclical characteristics in house prices. ...
... So far, most of the modern research into UK property cycles has been limited to the commercial property market sector (McGough and Tsolacos, 1995;RICS, 1994RICS, , 1999Barras, 2005;Ball and Grilli, 1997;Scott and Judge, 2000;Krystalogianni et al., 2004). Bracke (2013), among the few studies that concentrates on housing cycles, analysed data for 19 countries, including the UK. ...
Purpose
The study looks at the characteristics of upswings and downswings for UK housing cycles. Specifically, the purpose of this paper is to empirically analyse cycles in house prices and housing affordability on the characteristics of persistence, magnitude and severity.
Design/methodology/approach
The paper draws upon the triangular methodology of cycles and utilises housing data from the last three decades.
Findings
From an empirical perspective, the study obtained four main results. First, the graphical trajectory of cycles in house price and housing affordability is highly synchronized. Second, upturns in both cycles tend to be longer than downturns on average. Third, the recent upturn in house prices and housing affordability is characterised by larger duration, magnitude and severity than the earlier case. Fourth, the latest downturn in both cycles is highly synchronised in terms of time occurrence, persistence, magnitude and severity; in addition, in both cases, the latest downturn is considerably smaller than the previous one. The study additionally indicates that on average the length of a complete house price and housing affordability cycle is 19 years on a peak-to-peak basis.
Research limitations/implications
This paper is essentially exploratory and raises a number of questions for further investigation. Future research should, first, arrive at a more nuanced definition of affordability and, second, examine causality. The fact that two phenomena appear to have some significant synchronicity is not an indication that they are interdependent, although logic would suggest they might be.
Originality/value
This is among the few papers that analyses cycles in UK house prices. It is the first study that draws attention to the housing affordability cycle and the first to compare cycles in house prices with cycles in housing affordability.
... They also pointed out that the literature is replete with theoretical discussions regarding the economic incidents of development contributions and the possible price effects on new housing. Ball and Grilli (1997) argued that modelling of UK commercial property development has been a growth industry in recent years. They examined the time series characteristics of the data on commercial output and considered the fruitfulness of modelling strategies with respect to it. ...
... However, availability of land is of critical importance to the development process and must be strictly adhered to (Cadman and Topping, 1996). Unlike what obtains in other markets, the product in property implies "change of land use" or an "alteration to an existing building" in a combination with other factors of production -labour (Healey, 1992;Montezuma and Gibb, 2006); materials (Ball and Grilli, 1997); and finance (Delaney and Hayward, 1994;Adair et al., 2007). Cadman and Topping (1996) upheld this view when they emphasised on what they ascribed to as the 'eight stages' through the development process from initiation to disposal (see Figure 1). ...
This paper reviews the role of the Nigerian government's intervention to restore order in the property market over three decades – with the establishment of the Federal Mortgage Bank of Nigeria in 1977; Primary Mortgage Institutions in 1989; National Housing Fund and Federal Mortgage Finance Limited in 1992 and 1993 respectively. From our theoretical evaluation of the existing policy and research papers, we note the entrenched instability in the sector. We therefore highlight some of the main moderating influences that underpin this instability with very strong recommendations as to 'where' and 'how' to restore sanity into this sector that has all the hallmarks of the next 'engine of growth' for the nation's economy.
... Four building cycles of different durations were observed by the fundamental work of Barras ( ): a first one endogenously generated building cycle from 8 to 10 years, a shorter cycle from 4 to 5 years mainly caused by demand influence of the business cycle, a 40-50-year-long wave caused by the effect on technological improvements and finally a 15-20-year-long cycle subjected to speculative investment. Two different cycles have been identified for the commercial property market by Ball and Grilli (1997): the former long cycle running from 1955 to 1980 and a latter shorter one from 1980 to 1996. The greatest part of the contributions focused on the property market cycle analysis with few integration with property valuation profession. ...
There are several underlying factors of cyclicality in property markets. Two of these factors are heuristics and biases which have significant impacts on appraiser judgments in real estate valuation process. All estimates include a kind of uncertainty at different levels, and real estate valuation also includes an uncertainty as it is a price estimate aiming to determine the present value of future cash flows. The uncertainty may increase the tendency to use heuristics and biases during real estate valuation due to the complex nature of valuation decision-making. Based on the relevant empirical and experimental literature, these heuristics and biases widely investigated are anchoring and adjustment heuristic, recency heuristic, herding behavior, representative heuristic, loss aversion, regret aversion, false reference point, client feedback, and appraisal smoothing bias. The aim of this study is to explain the role of uncertainty which gives rise to heuristics and to highlight the relation between these heuristics and real estate valuation process and cycles.
... Four building cycles of different durations were observed by the fundamental work of Barras ( ): a first one endogenously generated building cycle from 8 to 10 years, a shorter cycle from 4 to 5 years mainly caused by demand influence of the business cycle, a 40-50-year-long wave caused by the effect on technological improvements and finally a 15-20-year-long cycle subjected to speculative investment. Two different cycles have been identified for the commercial property market by Ball and Grilli (1997): the former long cycle running from 1955 to 1980 and a latter shorter one from 1980 to 1996. The greatest part of the contributions focused on the property market cycle analysis with few integration with property valuation profession. ...
The introduction of the definition of cyclical assets in the International Valuation Standards (IVSC, 2017, 2020) requires a specific attention while valuing commercial properties with direct capitalization or discounted cash flow analysis. Following the introduction of cyclical capitalization model (d’Amato, Int J Strategic Property Manag 19(3):207–219, 2015) provides a possible solution for the problem of the integration of property market cycle inside the valuation process. In this vein the contribution explores the relationship between inputs and output in the cyclical yield capitalization modelling defining a relationship between variability of market trend and variability of the opinion of value. Evidence confirms the stability of the opinion of value provided by this kind of method.KeywordsCyclical yield capitalizationVariabilityProperty market value
... Four building cycles of different durations were observed by the fundamental work of Barras ( ): a first one endogenously generated building cycle from 8 to 10 years, a shorter cycle from 4 to 5 years mainly caused by demand influence of the business cycle, a 40-50-year-long wave caused by the effect on technological improvements and finally a 15-20-year-long cycle subjected to speculative investment. Two different cycles have been identified for the commercial property market by Ball and Grilli (1997): the former long cycle running from 1955 to 1980 and a latter shorter one from 1980 to 1996. The greatest part of the contributions focused on the property market cycle analysis with few integration with property valuation profession. ...
The present chapter is an introduction to the first part of the book dealing with the problem of porperty market cycle at theorical level. It seems that property market cycle as an indirect violation of market perfection. This is the reason why in this book we try to create a relationship between property market cycle analysis and professional valuations. This part is a necessary premise to such kind of integration. In this introduction the general organization of the contributions of the first part is provided.
... Four building cycles of different durations were observed by the fundamental work of Barras ( ): a first one endogenously generated building cycle from 8 to 10 years, a shorter cycle from 4 to 5 years mainly caused by demand influence of the business cycle, a 40-50-year-long wave caused by the effect on technological improvements and finally a 15-20-year-long cycle subjected to speculative investment. Two different cycles have been identified for the commercial property market by Ball and Grilli (1997): the former long cycle running from 1955 to 1980 and a latter shorter one from 1980 to 1996. The greatest part of the contributions focused on the property market cycle analysis with few integration with property valuation profession. ...
Being aware of the importance and the relevance of property market cycle from social and economic points of views the second parts is dedicated to providing solutions. The contribution is an overview and an introduction to the contributions in the second part of the book mainly focused on providing solutions.
... Barras (2009) observes four building cycles of different durations: an endogenously generated major building cycle of eight to 10 years; a minor cycle of four to five years which reflect the demand influence of the business cycle; a long wave of 40-50 years caused by the impact of technological revolutions; and finally, a cycle of 15-20 years in length which is subjected to pressure from speculative investment and boom-bust cycles. Ball and Grilli (1997) identify two different cycles in the commercial property market: a former long cycle that ran from 1955 to 1980 and a latter shorter one from 1980 to 1996. The most significant component of these contributions is their focus on the role of the market cycle at the micro and macro levels and trying to determine the cause and effects of the property market cycle without reference to property valuation methods. ...
Whilst the property market shows cyclical behaviours, opinions of value based on income approaches assume that there is stable or perpetually growing (or decreasing) income without considering the effects of the property market cycle on leasing contracts. The paper therefore focuses on the application of a valuation method for income producing properties which have a value that is affected by the upturns and downturns of property market cycles. Continuing from the previous works in this area (d¡¦Amato, 2003, d¡¦Amato, 2013; d¡¦Amato, 2015) the income approach method here is applied to the office market in four areas of London. In applying this valuation method, property valuation and time series analysis are integrated. The work provides a general introduction on cyclical capitalization as another family of valuation methodologies based on the income approach and then an application of cyclical capitalization to areas of London which highlight their strength and weakness.
... • General, related, models [6,10,11]; ...
... However, the availability of land is of critical importance to the development process and must be strictly adhered to (Cadman and Topping, 1996). Unlike what obtains in other markets, the product in property implies "change of land use" or an "alteration to an existing building" in combination with other factors of productionlabour (Healey, 1992;Montezuma and Gibb, 2006); materials (Ball and Grilli, 1997); and finance (Delaney and Hayward, 1994;Adair et al., 2007). ...
Purpose
The purpose of this paper is to highlight the challenges of property development and management in northern Nigeria drawing upon the experiences of Bauchi, Gombe and Kaduna states.
Design/methodology/approach
Based on a longitudinal evaluation of these trends and challenges, this study draws upon a literature review and practitioner insights on property investment efforts in northern Nigeria. It also benefits from insider accounts related to the author’s 20-years’ experience of work both in both Nigeria and the UK.
Findings
The study highlights the salient factors that have brought about the housing challenges in northern Nigeria. Arguably poor property development and management initiatives have had direct correlations with the weak property management practices in these states and thereby further restricted investments in the real-estate sector in northern Nigeria.
Research limitations/implications
The limitations of the study are based on those attributable to personal observation and ethnographic studies as adopted in this case. This impacts upon the generalisability of the findings, however, sound the propositions may be. Areas for future research inquiry are also proffered.
Originality/value
The study is a critical reflection of developments in property management taken from the purview of the Nigerian real-estate market. While primarily a viewpoint paper, it does highlight some of the key challenges facing property management in a manner not previously discussed in the literature.
... However, a common factor is the need to recognize that, with the unique and heterogeneous qualities characterizing local markets, respecting local market differences must play a crucial role in diversification. As Ball and Grilli (1997) comment, planning policies, institutional behavior, market structure and demand and supply relationships all vary across local markets and are all crucial to the operation of those markets. Real estate researchers and managers must continue to monitor and investigate these markets to improve the robustness of real estate market classifications. ...
Executive Summary. Many real estate market classi-fications for portfolio diversification fail to reflect market fundamentals. Research has attempted to rectify this anomaly—no easy task given property's heterogeneity— but investment strategy and research continue to be dom-inated by traditional property classes. Two such classi-fications in the United Kingdom are examined in this paper. Responding to appeals in the literature, local mar-kets are grouped using cluster analysis and rental changes, a key dimension of and underlying influence on total returns. The resulting distribution of markets is compared to the traditional U.K. regional classification and a broader super-regional classification. In the retail sector, neither grouping is appropriate and attention must be focused on alternative market characteristics. In the office sector, the super-regional grouping is appropri-ate, reflecting user-group locational strategies.
... • General, related, models [6,10,11]; ...
The residential property market accounts for a substantial proportion of UK economic activity. Professional valuers estimate property values based on current bid prices (open market values). However, there is no reliable forecasting service for residential values with current bid prices being taken as the best indicator of future price movement. This approach has failed to predict the periodic market crises or to produce estimates of long-term sustainable value (a recent European Directive could be leading mortgage lenders towards the use of sustainable valuations in preference to the open market value). In this paper, we present artificial neural networks, trained using national housing transaction time series data, which forecasts future trends within the housing market.
... · General, related, models [6], [9], [11], [12]; ...
In this paper we show, by means of an example of its application to the problem of house price forecasting, an approach to attribute selection and dependence modelling utilising the Gamma Test (GT), a non-linear analysis algorithm that is described. The GT is employed in a two-stage process: first the GT drives a Genetic Algorithm (GA) to select a useful subset of features from a large dataset that we develop from eight economic statistical series of historical measures that may impact upon house price movement. Next we generate a predictive model utilising an Artificial Neural Network (ANN) trained to the Mean Squared Error (MSE) estimated by the GT, which accurately forecasts changes in the House Price Index (HPI). We present a background to the problem domain and demonstrate, based on results of this methodology, that the GT was of great utility in facilitating a GA based approach to extracting a sound predictive model from a large number of inputs in a data-point sparse real-world application.
... We use construction output rather than construction orders, because a change of nancial conditions is expected to affect actual cashh ow only of construction projects, and thereby the corresponding construction activity, and not construction orders. While the pattern of the receipt of orders must be ree ected to some extent in variations in construction outputs, Ball and Grilli (1997) suggest that output is likely to be a more accurate indicator than orders. ...
It is argued that money/credit supply is neutral with respect to the real sector. Existing studies have focused on the relationship between money supply and national output. However, this paper using data from Hong Kong (first quarter 1983-second quarter 1997) examines the extent to which fluctuations in the money supply cause (or Granger-cause) fluctuations in real construction activity. Specifically, it is found that: (i) construction activity flows and construction loans are cointegrated, but their lead-lag relationship cannot be established; (ii) there is a specific and strong causal relationship between the construction activity and the broadly defined money supply M3; and (iii) positive money-supply shocks have a larger effect on construction output than negative money-supply shocks.
... There is no generally-accepted best method of ® ltering time-series data to extract the cyclical component (see McGough and Tsolacos, 1995). This paper uses the structural times series (unobserved components) approach, used by Ball (1996) and Ball and Grilli (1997) to analyse the UK commercial property market, in an attempt to answer the questions: does the growth in property values follow a cycle, and if so what is the nature of that cycle? ...
This paper sets out progress during the first eighteen months of doctoral research into the City of London office market. The overall aim of the research is to explore relationships between office rents and the economy in the UK over the last 150 years. To do this, a database of lettings has been created from which a long run index of City office rents can be constructed. With this index, it should then be possible to analyse trends in rents and relationships with their long run determinants. The focus of this paper is on the creation of the rent database. First, it considers the existing secondary sources of long run rental data for the UK. This highlights a lack of information for years prior to 1970 and the need for primary data collection if earlier periods are to be studied. The paper then discusses the selection of the City of London and of the time period chosen for research. After this, it describes how a dataset covering the period 1860-1960 has been assembled using the records of property companies active in the City office market. It is hoped that, if successful, this research will contribute to existing knowledge on the long run characteristics of commercial real estate. In particular, it should add a price dimension (rents) to the existing long run information on stock/supply and investment. Hence, it should enable a more complete picture of the development and performance of commercial real estate through time to be gained.
Upturns and downturns of economic cycles may influence real estate market. The importance of real estate market cycle has been stressed in several contributions (Born and Pyhrr, 1990; Grover & Grover, 2013a, b). Although the great importance of the property market cycle for real estate market analysis, a gap between property valuation and property market cycle has been observed (Born and Pyhrr, 1990). Recently, the International Valua\tion Standards raised the problem of valuation of cyclical assets as terminal value of discounted cash flow analysis (IVS, 2017, General Standards IVS 105 Valuation Approaches and Methods, para 50.21 letter e). The recommendation of the International Standard is to replace traditional direct capitalization with valuation methods considering “…the cyclical nature of the asset…”. This chapter shows the limits of the present valuation practice in the context of property market cycle. It will be stressed how property market cycle influences property valuation. As a consequence, it is more and more relevant providing solutions to include property market cycle in the valuation process enhancing present valuation methods.
Purpose
Construction economics scholars have emphasised the importance of construction output forecasting and have called for increased investment in infrastructure projects due to the positive relationship between construction output and economic growth. However, construction output tends to fluctuate over time. Excessive changes in the volume of construction output have a negative impact upon the construction sector, such as liquidation of construction companies and job losses. Information gleaned from extant literature suggests that fluctuation in construction output is a global problem. Evidence indicates that modelling of construction output provides information for understanding the factors responsible for these changes.
Methodology
An interpretivist epistemological lens is adopted to conduct a systematic review of published studies on modelling of construction output. A thematic analysis is then presented, and the trends and gaps in current knowledge are highlighted.
Findings
It is observed that interest rate is the most common determinant of construction output. Also revealed is that very little is known about the underlying factors stimulating growth in the volume of investment in maintenance construction works. Further work is required to investigate the efficacy of using non-linear techniques for construction output modelling.
Originality
This study provides a contemporary mapping of existing knowledge relating to construction output and provides insights into gaps in current understanding that can be explored by future researchers.
Are global city office markets inherently unstable? This examination of office markets in major world cities analyses the flows of capital that create urban form, the nature of ownership, investment and occupation and the impact of office markets on economic stability. Towers of Capital - office markets & international financial services explores the relationship between the evolution of major international financial centres as part of the global capital market system, the development of office markets in those cities, real estate investment in those office markets and the patterns of risk and return that result from the interactions between financial flows and office markets. Rather than focusing on just one single aspect of the relationship, Colin Lizieri sets out the interconnections between the location of financial activity, the processes operating in office markets and the volatility of real estate returns. The resulting schematic model of IFC office markets provides insights into risk and will act as a springboard for subsequent empirical work. Towers of Capital develops a framework for understanding real estate and the transformation of the built environment in financial centres, based both on the development of global capital markets and on micro-level research into the functioning of office markets. By drawing together the insights, models and ideas that address global capital flows, the evolution of city systems, office market processes and real estate finance, the book will help students and researchers in property and urban planning, investors and policy advisors to understand the linkages between the evolution of financial markets, innovation in commercial real estate markets and the dynamics of the office markets in global cities.
Purpose
The purpose of this paper is to review what is known about property cycles following the financial crisis of 2008.
Design/methodology/approach
The method is to review the literature on property cycles published since the 1930s, to examine the extent to which endogenous causes have been identified as distinct from exogenous factors that may have produced cyclicality resulting from weak adjustment mechanisms but not cycles.
Findings
Whilst there is broad consensus that the property market has delays in adjustment which produce oscillations resulting from external shocks, it is more difficult to identify endogenous causes of cycles, though there are some possible candidates, notably technical progress.
Practical implications
The slump after 2008 has cost savers and taxpayers dear, so better means of predicting cycles so that policy makers can mitigate them is desirable.
Originality/value
The debate about whether property cycles result from exogenous shocks or endogenous causes is in danger of being lost sight of. If the former, then the property industry is a channel through which external factors feed through to the economy, albeit magnified by weak adjustment factors. If there are endogenous causes, then policy makers would be unwise to overlook their potential destabilising impact on the economy.
Models of the commercial property market have become increasingly sophisticated in recent years. However, the retail sector and, more specifically, analysis of retail markets at the local level, have been comparatively neglected. This paper makes inroads into this gap in property research. Retail rental change at the local level is explored, focusing on consumer expenditure as the key determinant of change. The appropriateness of proxy variables is investigated and the mechanisms of rental change are examined. This highlights issues and difficulties unique to local level analysis. Following this, the relationship between rental change and underlying changes in consumer expenditure is investigated. The stability of a panel model of rental change is examined, with differences in market functioning identified across diverse groups of key local retail investment markets. These differences highlight the re-emergence of northern markets during both the economic decline and recovery phases of the last decade of the 20th century. Rental levels in larger and smaller markets are also seen to respond to changes in consumer expenditure to significantly different degrees, in periods of both decline and recovery.
The modelling of UK property markets using construction statistics faces considerable problems because of the way in which those statistics are drawn up. These difficulties are shown here to include data accuracy; the impact of large projects; the cost indices used to deflate current price data; missing information; the addition of unrecorded output and estimates that induce serial correlation. Such problems make the data relatively poor bases on which to formulate property market forecasts. Ex post forecasting analysis over two horizons showed that simple regression models, which include variables that affect development profitability, did not outperform ARIMA models, which are based solely on the construction statistics. The available floor-space data are also poor indicators of building supply. There seems to be a strong case for the government to improve the quality of the commercial supply data it provides.
This paper empirically models the determinants of Goodwill using Structural Equation Modeling. It employs a two-stage model that estimates Goodwill in a stage one using the regression model and then includes predicted in a stage two demand model investigating endogenous and exogenous determinants of Goodwill. The data includes information on premium rents for 522 retail trade area in Seoul, South Korea. The major findings are as follows: Firstly, there is a high correlation between Goodwill and retail rents from utilizing the retail property. It reveals that the higher the Goodwill has the higher the retail rent in commercial area of Seoul. Secondly, Goodwill is influenced by the retail rental price factor, Low-Income Population and Low-Density Housing. The analysis shows that economic factors within the retail traded-area have highly affected Goodwill at the statistically significant level with the reliable model in Seoul city.
This work applies state-of-the-art artificial intelligence forecasting methods to provide new evidence of the comparative performance of statistically weighted Divisia indices vis-à-vis their simple sum counterparts in a simple inflation forecasting experiment. We develop a new approach that uses co-evolution (using neural networks and evolutionary strategies) as a predictive tool. This approach is simple to implement yet produces results that outperform stand-alone neural network predictions. Results suggest that superior tracking of inflation is possible for models that employ a Divisia M2 measure of money that has been adjusted to incorporate a learning mechanism to allow individuals to gradually alter their perceptions of the increased productivity of money. Divisia measures of money outperform their simple sum counterparts as macroeconomic indicators.
The volatility of commercial property markets in the United Kingdomhas stimulated the development of explanatory models of 'price' determination. These models have tended to focus on the demand-side as the driver of change. A corollary of this is that, despite the fact that construction lags are known to exacerbate cyclical fluctuations, the supply-side adjustment mechanism has been subject to relatively little research effort. In this paper the authors develop a new model of commercial property markets in the United Kingdom. The model is adapted from Poterba's two-equation asset-market approach to modelling the housing market. The first equation is an arbitrage relationship where the return on property is made up of rent, as determined in the user market for property services, and the capital gain, which is dependent on the return on alternative assets. This can be interpreted as a 'stock' demand equation. The second equation explains that 'flow' supply is determined by real capital values. The long-run empirical generalisation of the two-equation model allows the authors to estimate two key behavioural parameters required in explaining supply-side adjustment to market change. First, the authors interpret the coefficient on the capital value variable in the supply equation as an estimate of the long-run 'price' elasticity of supply. Second, from the demand equation, they estimate the extent to which new supply can act as an 'automatic stabiliser' on property values. It is argued that although increases in demand drive up property values, new development is also initiated and will, in turn, dampen down the growth in real capital values. The equations are estimated for the office, industrial, and retail sectors. Although there are no comparable estimates of supply elasticities in the real estate economics literature, the results are generally consistent with prior knowledge. Estimates of the stabiliser effect are also plausible and, taken together, the supply-side parameters help provide insights required in understanding property market dynamics in the last twenty-five years.
The authors model retail rents in the United Kingdom with use of vector-autoregressive and time-series models. Two retail rent series are used, compiled by LaSalle Investment Management and CB Hillier Parker, and the emphasis is on forecasting. The results suggest that the use of the vector-autoregression and time-series models in this paper can pick up important features of the data that are useful for forecasting purposes. The relative forecasting performance of the models appears to be subject to the length of the forecast time-horizon. The results also show that the variables which were appropriate for inclusion in the vector-autoregression systems differ between the two rent series, suggesting that the structure of optimal models for predicting retail rents could be specific to the rent index used. Ex ante forecasts from our time-series suggest that both LaSalle Investment Management and CB Hillier Parker real retail rents will exhibit an annual growth rate above their long-term mean.
In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.
Recent years have seen rapid developments in trend and cycle estimation. The Kalman filter approach to detrending has been used by several historians to interpret macroeconomic time series for the UK since the 18th century. In this paper we apply this detrending technique to UK national income and investment data to highlight both the usefulness of the approach and its limitations. In particular we argue that it cannot be regarded as a neutral arbiter of historical disputes because of the important role played by historical judgment and underlying economic theories. Yet this does not detract from the method but rather increases its usefulness as a heuristic device.
The paper describes the pronounced 'long swings' or 'urban development cycles' of 20-30 years duration which have created successive waves of urbanisation in the British economy since the Industrial Revolution, and which can be related to successive long waves of technological development within the economy as a whole. A more detailed examination of the post-war period shows that in each sector of building two types of shorter cycles, causing pronounced building booms and slumps, are superimposed on the dominant long swing of post war urban development. The discussion concludes by examining the prospects for the next urban development cycle in Britain related to the new wave of micro-electronic and information technologies, and then draws out the main policy implications of the analysis.
In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.
Interest has grown again in recent years about the long-term and cyclical nature of building investment and its effect on the macroeconomy, This paper investigates the nature of building trends and cycles from the 19th century to the present day for eight major OECD economies. Focusing predominantly on non-housing structures, the Kalman filter is used to decompose the series into trends and cycles, It was found that building cycles exist in all countries, though with considerable variation, Comparisons of volatility between countries and between the different types of fixed investment are made, The long-run share of fixed investment in structures as a proportion of national income is investigated, Consideration is given to whether international building investment trends are coincident, and an analysis made of the long-term correlation between structures investment cycles
Previous studies of the correspondence between prices and valuations in the UK are considered to be deficient in their formulation of the regression relationship between prices and valuations, in their statistical analyses and in their interpretation of pricing accuracy. Applying a rigorous econometric approach, this paper reports the results of more extensive testing than has been undertaken to date, thereby enabling robust conclusions. In particular, evidence is found for valuation bias under three different market environments. This supports the claim that valuers may not be using all available information at the time of valuation. Figures for pricing/valuation accuracy are reported, showing a wide range of uncertainty as regards the eventual selling price. The results imply that performance measurement and league table rankings may need to be qualified and that the routine application of fixed parameter unsmoothing procedures to valuation‐based property indices may be invalid.
The property market is subject to not one but several cyclical influences of different periodicity. These only combine to produce major speculative building booms when there is a particular convergence of market conditions involving strong demand growth, supply shortages and credit expansion. The recent boom and slump is the second of this type in the postwar period, and shows many similarities to that of the early 1970s, both in terms of its underlying causes and its destabilizing impact on the property market. Such a cycle is unlikely to be repeated until at least the middle of the next decade.
Studies which use modern portfolio theory (MPT) to calculate the optimal allocation to property in a multi‐asset portfolio are fundamentally flawed. These suggest optimal theoretical allocations for property which are much higher than actual allocations to property. Criticism can be made of: the exclusion of other eligible assets from the analysis; the use of a mean‐variance optimization technique on estimated data; the inadequacies of the historical data which understates risk and correlation and may overstate return; the changing characteristics of property as an investment; the indivisibility of property and the consequent difficulties in achieving a diversified property portfolio; the complexity of risk as a concept compared to the simple and simplistic definition used in MPT; and the omission of explicit consideration of differential liquidity. An alternative which offers a more practicable framework for decision‐making is a combination of econometric techniques to forecast income under differing economic scenarios and a discounted cash flow valuation model. This would produce a proper expectations‐based analysis of return and risk. However, it will always be important to understand the complexity of investors objectives as these extend far beyond the simple return‐risk trade‐off used in MPT.
In this paper a review is given of the theory of the long wave or Kondratieff cycle. Five different categories of explanations are discussed, of which the most important ones are Schumpeter's innovation theory and the alternations in the growth of fixed capital, recently stressed again by Forrester. To these elements the concept of the industry life cycle and an explanation of clusters of basic innovations are added to complete an endogenous long wave mechanism. Using Schumpeter's four phases a long wave chronology is presented. This suggests that in the mid-1970s Western economies have entered the depression phase of the long wave.[/p]
In this paper the causes and consequences of the property boom of the late 1980s are considered that in one way or another affected most developed economies and several industrialising ones. It is suggested that technical change in key service industries caused an upsurge in building demand from the mid-1970s onwards. Shifts in employment patterns then generated repercussions in housing markets. The classic conditions were created for a 'Kuznets style' building cycle. The detailed effects of these changes in specific countries depended on the responses by agents involved in the process of building provision, which in turn were affected by the changing economic and institutional contexts that they faced. Property development, financial liberation, housing markets, property taxation, and land-use planning are all considered in this context, with examples drawn from several countries.
This paper is a presentation of the results of the third stage of a project designed to investigate the incidence and causes of postwar building cycles in the British economy. In the first stage spectral analysis was used to identify the main postwar cycles in each sector of building (industrial, commercial, and residential); the second stage involved the development of a theoretical framework suitable for dynamic modelling of these cycles; and the third stage was concerned with estimating the best time-series model for each cycle. The estimated models demonstrate the presence of both an endogenous supply-side mechanism creating major building cycles of up to nine years' duration, and the exogenous influence of business-cycle fluctuations within user and investment submarkets which are transmitted via the demand for property into short building cycles of four to five years' duration. In addition, the models demonstrate how the building cycle in each sector may be influenced by other factors, such as development costs and property rents and values.
The paper is a report on the second stage of a project designed to investigate the incidence and causes of postwar building cycles in the British economy. In the first stage spectral analysis was used to identify the main postwar cycles in each sector of building (industrial, commercial, and residential), and the second stage has been concerned with the development of a theoretical framework suitable for dynamic modelling of these cycles. The modelling framework incorporates both an endogenous cyclical mechanism of the type used in accelerator models of investment, to reflect the long production lags in building activity, and the exogenous influence on the building cycle of variations in economic factors such as gross domestic product and interest rates. The modelling technique used to formulate the theoretical framework is based upon a transfer-function model of the Box - Jenkins type, incorporating an error-correction mechanism to reproduce the short-run dynamics and long-run equilibrium relationships between the variables. The third stage empirical results of the model-building exercise are reported in a separate paper.
A review of the post WWII data on national office building construction and vacancy, reveals a recurrent ten-twelve year cycle. Specifying and estimating a structural econometric model for these series leads to several conclusions about this commercial real estate sector. First, the office market appears to "clear" quite slowly, and long-run expectations play an important role in market behavior. Second, supply is definitely more responsive to market conditions than demand. Finally, a six-year forecast suggests that the current over-supply in the market will not go away as fast as in the past. Copyright American Real Estate and Urban Economics Association.
The stylized facts of macroeconomic time series can be presented by fitting structural time series models. Within this framework, we analyze the consequences of the widely used detrending technique popularized by Hodrick and Prescott (1980). It is shown that mechanical detrending based on the Hodrick-Prescott filter can lead investigators to report spurious cyclical behavior, and this point is illustrated with empirical examples. Structural time-series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components. Finally, the structural framework provides a basis for exposing the limitations of ARIMA methodology and models based on a deterministic trend with a single break. Copyright 1993 by John Wiley & Sons, Ltd.
Detrending and business cycle facts. Centre for Economic Research Discussion Paper (782)
- F Canova
Canova, F. (1993) Detrending and business cycle facts. Centre for Economic Research Discussion Paper (782), London.
What became of the building cycle? Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz
- B G Hickman
Hickman, B.G. (1973) What became of the building cycle? Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, David, P. and Reder, M. (eds) Academic Press, New York, p. 383.
Understanding the Property Cycle. Main Report: Economic Cycles and Property Cycles
- T Key
- B Macgregor
- N Nanthakumaran
- F Zaresh
Key, T., MacGregor, B., Nanthakumaran, N. and Zaresh, F. (1995) Understanding the Property Cycle. Main Report: Economic Cycles and Property Cycles, Royal Institute of Chartered Surveyors, London.
The Property Masters, The Long Wave in Economic Life
- P Scott
- Spon
- London
- Van
- J J Duijn
Scott, P. (1996) The Property Masters, E & FN Spon, London. Van Duijn, J.J. (1983) The Long Wave in Economic Life, George Allen & Unwin, London.
Housing and Construction: A Troubled Relationship
- M Ball
Understanding the Property Cycle. Main Report: Economic Cycles and Property Cycles, Royal Institute of Chartered Surveyors
- T Key
- B Macgregor
- N Nanthakumaran
- F Zaresh