Modeling and Simulation of the Endogenous Dynamics of Housing Market Cycles

The purpose of this study is to model and analyze by simulation the dynamics of endogenously created oscillations in real estate (housing) prices. A system dynamics simulation model is built to understand some of the structural sources of cycles in the key housing market variables, from the perspective of construction companies. The model focuses on the economic balance dynamics between supply and demand. Because of the unavoidable delays in the perception of the real estate market conditions and construction of new buildings, prices and related market variables exhibit strong oscillations. Two policies are tested to reduce the oscillations: decreasing the construction time, and taking into account the houses under construction in starting new projects. Both policies yield significantly reduced oscillations, more stable behaviors.