Macroeconomic Policy and Real Estate, Stock Market Impact Analysis

This paper models a key aspect of real estate market uncertainty, i.e. the frequent mismatch between office demand and supply under the impact of the macro economy, macroeconomic policy and the domestic stock market. The dynamic interaction of this aspect of the office sector’s market uncertainty is structured under the demand-side and supply-side aspects. Prices in the form of office rents, total returns and CVs (capital values) affect changing office investment. These prices are determined by office demand and supply regardless of the speed of adjustment. Office demand in turn depends on macroeconomic policies like economic growth policy, interest rate policy and fiscal policy. Macroeconomic factors are envisaged to influence the movement of office prices because private investors and developers tend to view the office sector as an alternative to the domestic share market. This is attributed to balanced portfolios so that the rate of return in the domestic share market moves in line with the office sector. Equity-investment prices may well vary with office prices, proxied by a composite private office price index. In examining the relationships between the private office price index and related variables, the short-term future movements of the index may well be modeled, that mirror the supply and demand determinants at work. In turn, the index would be influenced by supply-side determinants (with a structural lag), which include units completed and under construction for the office sector; and the price index for building materials. The demand-side determinants would include rents, CVs and the annual yields. This paper introduces system dynamics modeling in order to structure the associated complex system aspects, as outlined above, involving the macro economy, macroeconomic policy, the domestic stock market and the office sector. System dynamics is concerned with the formation of causal feedback control loops, algebraic equation and model formulation, model validation in terms of the ex post forecasts of the relevant estimated equations, policy analysis as well as scenario planning that is concerned with foreseeable ex ante outlooks. _____________________________________________________________________ For correspondence, kindly forward to the first joint-author by email at [email protected] or by mail at Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566. *Associate Professor, ** Assistant Professor.