System Dynamics Modeling of Chinese Urban Housing Markets for Pedagogical and Policy Analysis Purposes

Although numerous academic papers have applied system dynamics (SD) models to real estate markets over the past generation, the technique remains relatively unknown and little used both in the academic economics literature and, more to the point, among practitioners and educators in the real estate community. Yet SD has the potential to address key needs among these constituencies. SD can provide intuitive and transparent models that should be able to improve pedagogy for educating large numbers of potential real estate entrepreneurs particularly in emerging market countries. SD models can more easily accommodate non-market features and unique institutional components of actual real estate markets especially in emerging market countries. And SD models are particularly oriented toward modeling market transitions toward long-run equilibria, facilitating the study of the dynamic path the market follows and which dominates the real history of housing markets in emerging market countries. In the present paper we report on the current state of a project to develop a SD model for urban housing markets in China, aimed at facilitating policy analysis as well as the support of practical educational tools that might reach large masses of potential entrepreneurs in that country. Depreciation is caused almost entirely by decline in current real income, only secondarily by increase in the capitalization rate (“cap rate creep”). Depreciation rates vary considerably across metropolitan areas, with areas characterized by space market supply constraints exhibiting notably less depreciation. This is particularly true when the supply constraints are caused by physical land scarcity (as distinct from regulatory constraints). Commercial real estate asset market pricing, as indicated by transaction cap rates, is strongly related to depreciation differences across metro areas. System Dynamics Modeling of Chinese Urban Housing Markets for Pedagogical and Policy Analysis Purposes By Xin Zhang, David Geltner, & Richard de Neufville MIT Engineering Systems Division & Center for Real Estate PRELIMINARY DRAFT This version: April 30, 2015 Abstract: Although numerous academic papers have applied system dynamics (SD) models to real estate markets over the past generation, the technique remains relatively unknown and little used both in the academic economics literature and, more to the point, among practitioners and educators in the real estate community. Yet SD has the potential to address key needs among these constituencies. SD can provide intuitive and transparent models that should be able to improve pedagogy for educating large numbers of potential real estate entrepreneurs particularly in emerging market countries. SD models can more easily accommodate non-market features and unique institutional components of actual real estate markets especially in emerging market countries. And SD models are particularly oriented toward modeling market transitions toward long-run equilibria, facilitating the study of the dynamic path the market follows and which dominates the real history of housing markets in emerging market countries. In the present paper we report on the current state of a project to develop a SD model for urban housing markets in China, aimed at facilitating policy analysis as well as the support of practical educational tools that might reach large masses of potential entrepreneurs in that country. Introduction: China’s Urban Housing Market The past generation has witnessed in China the greatest urbanization in world history to date. Over 500 million people moved from rural to urban settlement from 1980 to 2015, and this process continues. At least another 250 million inhabitants will move to urban areas in China by the year 2030. Furthermore, real per capita incomes have been doubling roughly every seven years, and will likely continue to grow at very rapid rates, resulting in tremendous increase in demand both in terms of the quality and the quantity of urban housing, including renovation and reconstruction of the existing stock as well as new stock. It is impressive that Chinese cities have