System Dynamics as a complementary method for Real Estate June 27th, 2009 Martijn Eskinasi

What is system dynamics? An explanatory and simulation methodology Used for both quantitative and qualitative modeling Used in expert approach and interactive learning processes Its claim to fame: –“Find robust policy measures for highly complex dynamic problems”

Basic ideas & concepts Structure of a system drives its dynamic behaviour in time Structure is based on causal loop, stocks and flows Policy measures are very tenacious Because people cannot mentally simulate highly complex dynamic systems Murphy's law in practice??

Causal loops and feedback Axioma of circular causalities and feedback Reality consists of intertwined causal loops –“Laundry list thinking” is not realistic, at least does not lead to dynamic behaviour Identify causal relations –Positive and negative polarities Identify the causal loops! –Balancing and reinforcing

Some simple examples Rent Deman d Structure Behaviour O B Yield Compression Investor frenzy R

Some small examples Flows are change rates over time Stocks integrate and accumulate Stock DemolitionConstruction

But modeling can get complex rapidly

Track record of SD in Real Estate J.W. Forrester (1969), Urban Dynamics Bakken & Sterman (1993) Commercial RE flight simulator Barlas et al (2007) RE Price oscillations in Istanbul Cheng (2005) Modeling Shanghai RE Markets Klammt (2000) Modeling in CREM Kummerow (1999) Cyclical Office Oversupply Price & Kelly (2005) Boston Housing Dynamics And much more

Evaluation of usefulness for RE research Assets Strong basic paradigm Stock / flow concept SD Society Expert and interactive Software Drawbacks No spatial dimension Risk of complexity

Putting SD to the test Rent Stock Construction Price Demand curve Interest Stock adjustment Construction curve Stock adjustment Rent Price Stock Construction O Demand Interest O Delay Interest B

Testing a simple simulation model Wheaton & DiPasquale Test for demand shift –At t =10: 600k + 10% Test for interest change –At t =60: 5% → 6%

Conclusion and discussion System Dynamics is a useful method for RE Research –Complex systems and dynamic behaviour –Stock and flows as building blocks –Scientific community, track record, software A simple WdP model provides plausible results –Responds to market stimuli as expected We will see an upswing in SD RE Research –But that's ultimately up to you....