‘Perfect’ Real Estate Liquidity and Adjustment Paths to Long-run Equilibrium

June 14, 2012

By Noriko Ashiya

Faculty of Real Estate Science, Meikai University

European Real Estate Society

Conference 2012, June 13 – 16th, 2012

in Edinburgh

purpose of this paper• formulate an example of the international

macro economic climate

with ‘perfect’ real estate liquidity

• identify the crucial implications

brought by such extreme degrees of real estate liquidity

or ‘financial’ real estate.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

method of analysis•extend the traditional Keynesian

international macroeconomic model,

revisited and modified in the study of Branson and Buiter (1983)

•construct a simple analytical framework with perfect/extreme degrees of

Real estate liquidity

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

findings •after the increase in the foreign interest rate, •real estate liquidity may help reduce the

fluctuations of home output •along an adjustment path •between one equilibrium position and another.

i.e., Real estate liquidity serve as a buffer against influences from foreign countries although within the setting of a theoretical perfect market.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

traditional Keynesian model• Not have a focus on ‘perfect’ real estate liquidity

Rosengren (2010) pointed out:

(1) the need for better understanding of the links between financial intermediaries, financial markets, and the real economy.

(2) those financial links to the real economy are only crudely incorporated　 into most macroeconomic modeling.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

the model in this paper

•assumes ‘perfect’ real estate liquidity i.e., classifies real estate as a

financial asset, not as a real asset.

• includes liquidized real estate, denoted by LRE, in the asset menu as:

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

LREeFBMW Equation (1)

Note that,• the assumption of perfect real estate liquidity will overstate the case

i.e., all real estate in the system is perfectly securitized and thereby exists as a securitization product in a financial asset portfolio.

but makes it possible to formulate the simplest example of the recent international macro economic climate

with expanded securitization markets

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

Definitions of equilibriums (1): SHORT-RUN FLOW EQUILIBRIUM•defined by the IS-LM equilibrium

conditions.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

),,*(

p

LREeFBM

p

Vq

e

eiL

p

M

LM curve: Equation (4)

qp

V

p

e

p

LREeFBM

p

eFigq

p

V

p

p

e

eixg

p

V

p

LREeFBM

p

eFigq

p

V

p

p

e

eia

),,*

)(,*(),*

)(,*(

IS curve: Equation(5)

Definitions of equilibriums (2): LONG-RUN STOCK EQUILIBRIUM•defined by the IS-LM equilibrium plus

current account balance.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

),*,(p

LREeFBM

p

VqiL

p

M

LM curve: Equation (8)

qp

V

p

e

p

LREeFBM

p

eFigq

p

Vixg

p

V

p

LREeFBM

p

eFigq

p

Via

),,

*)(*,(),

*)(*,(

IS curve:Equation (9)

),,*

)(*,(*p

e

p

LREeFBM

p

eFigq

p

VipxeFi

BP curve:Equation (10)

SHORT-RUN EFFECTS

•the right-hand side of Equation (16) expresses the boundary value, Bs, which determines the indicators of the foreign interest rate hike results.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

v

F

i

LP

VF

xixa

V

eFxaxa

V

x

V

Fxaixa

L

L

*

1)*)()()(

)(*)(

4222211

43322

1

3

Equation (16)

LONG-RUN EFFECTS

•the right-hand side of Equation (22) expresses the boundary value, BL, which determines the indicators of the foreign interest rate hike results.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

*

1*)1()1(

*)1(

3221

32

1

3

i

LP

vxix

V

eFaa

xix

L

L

Equation (22)

List of symbols

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

LINK BETWEEN THE SHORT-RUN AND LONG-RUN EFFECTS (1) visualized link

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

LINK BETWEEN THE SHORT-RUN AND LONG-RUN EFFECTS (2) The role of LRE

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

Summary: ADJUSTMENT PATHS TO LONG-RUN EQUILIBRIUM

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

CONCLUSIONS

• real estate liquidity may serve as a buffer against influences from foreign countries

• without real estate liquidity, the positive foreign interest rate effect in the short-run would be reversed in the long-run.

• the patterns of fluctuations of home output along an adjustment path towards long-run

equilibrium would be (1) stable under ‘perfect’ real estate

liquidity (2) unstable under real estate non-liquidity.

European Real Estate Society Conference

2012, June 13 – 16th, 2012 in Edinburgh

‘Perfect’ Real Estate Liquidity and Adjustment Paths to Long-run Equilibrium

June 14, 2012

By Noriko Ashiya

Faculty of Real Estate Science, Meikai University Thank you very much indeed!

European Real Estate Society

Conference 2012, June 13 – 16th, 2012

in Edinburgh