From modelling tools towards the market itself--an opportunity for sustainability assessment?

ABSTRACT. Market based analyses of residential property value traditionally fall within two broad research traditions: a 'more practical' value analysis tradition and a 'more academic' market analysis tradition. While there is a steady flow of information from the latter to the former direction, until recently very little such information diffusion has occurred from the former to the latter modelling tradition. In such a learning process, the value modelling performance could serve as a guideline for what kind of market model is valid and feasible for a given dataset with certain recognisable tendencies. On the other hand, the characterisation of particular market circumstances is a key determinant of real estate sustainability. A sustainable market generates a sustainable value, which then can be used as an attractiveness indicator in a broader sense; or in the opposite case, an unsustainable market diagnoses a problem in unsustainable value.

KEYWORDS: Modelling; Market; Sustainability; Residential property value

1. INTRODUCTION

In real estate studies it seems normal to assume a tension (or even incompatibility) between sustainable development approaches on one hand, and microeconomic modelling approaches on the other. Recently, however, this dichotomy in paradigms is beginning to change. We are witnessing an emergence of a variety of alternative conceptualisations that explicitly recognise how the market structures are being shaped by institutional and behavioural processes that involve considerations of a differentiated and partly qualitative nature.

Market based analyses of residential property value traditionally fall within two broad research traditions: 'the more practical tradition' is preoccupied with improving the modelling performance for mass appraisal purposes, whereas 'the more academic tradition' primarily attempt to ascertain associations and correlations between property price and other physical, social-economic and environmental (and sometimes behavioural and institutional) variables in order to determine an empirical relationship or at least patterns. We could here distinguish between a 'value analysis' tradition and a 'market analysis' tradition. While there is a steady flow of information from the latter to the former direction, first through the hedonic price/market modelling concept that was developed in the late 60s to early 70s, and then from the late 70s onwards through the segmentation/submarket concept (e.g. Maclennan, 1977; Grigsby et al., 1987; Watkins, 2001), until recently very little such information diffusion has occurred from the former to the latter modelling tradition (but see Lentz and Wang, 1998; Kauko, 2004b; and Borst, 2007). This reveals an untapped opportunity to develop socio-economic and environmental methodology for broader assessment of the built environment based on 'value analysis', given that the communities involved in state-of-the-art quantitative and practice-driven value modelling (i.e. mass appraisal) possess a remarkably powerful arsenal of methods and techniques--with a varying degree of reliance on computerization as well as 'behaviouralist' and 'rationalist' assumptions. Arguably mass appraisal has a broader importance, as it offers a generic possibility to link the property value with various characteristics of the building, plot and its vicinity, as well as with social and functional features of the neighbourhood and local area.

It can however be argued that the research community of real estate appraisal and market modelling needs a better understanding of differentiated market processes and micro structures. In a forthcoming volume (edited by Kauko and d'Amato, 2008) several authors compared and assessed a variety of approaches, some of which may be considered advanced and others emerging. Using the accuracy of value prediction and other performance criteria against the linear, parametric multiple regression analysis (MRA) benchmark, the relative accuracy performances of the methods varied across the datasets. In fact, using datasets that are more heterogeneous in term of the composition of the property, location and environmental characteristics (several house types, varying features of the nature and population etc), the more advanced methods tended to outperform MRA, but using a more homogeneous set the advantage in favour of the advanced method was smaller or non-existing. In a few cases the result was the opposite: MRA outperforming the more advanced method. This indication of context dependent market modelling performance is potentially a powerful finding that moves the discussion to another level. On the other hand, by being able to conduct such a more comprehensive/realistic analysis of the market, we can at the same time take the opportunity to provide tools for sustainability analysis. Sustainability is defined as a long-term criteria for development that has (at least) social, cultural, ecological, environmental and--indeed--economic dimensions. Thus there is also an economic sustainability--or sustainable market! This refers to material growth and prices of commodities, but the perspective essentially is long term, and related to a corresponding development in measurements of affordability as well as quality of life (QOL) in its tangible and intangible dimensions. Town planners use terms such as attractiveness and economic viability--probably meaning similar concepts. However, this is not the same as economic efficiency. In fact, empirical evidence shows that it is not economic efficiency but economic security together with QOL that induces the most sustainable economic growth (Rothschild, 2005). While countering the neoclassical dogma, and therefore not widely applied in real estate economics, this reasoning involves potentially valuable concepts for a long-term analysis of the real estate prices. Let us now enter this evolving discussion.

2. ECONOMIC GROWTH DISCOURSES AND REAL ESTATE: 'IT'S QOL AND SECURITY, NOT EFFICIENCY, STUPID'

Discourses in general economics and economic geography tend to distinguish between 'real costs and benefits' on one hand, and `transaction costs' on the other. The latter is a more recently established concept, which is meant to ascertain seemingly non-rational but in the long-term economically efficient market behaviour and courses of action. According to the popular mantra of 'New Institutional Economics' (NIE), economic efficiency will induce growth. Following ideas by Douglass North, this universal goal will be achieved through minimizing the transaction costs. It is as simple as that, and for the real estate--an applied field of economics--the same principle applies. In one such account, Fisher and Jaffe (2000) investigate the nature of restitution in transition countries.

Arguably, this view is only partial--a half-truth at the most. In reality public institutions that incur transaction costs can be advantageous for the market too. For example, in the renewal of the ninth district in Budapest inner city (Hungary), using a Public-Private-Partnership (PPP) agreement the quality of the environment and the dwellings were improved fundamentally, which consequently led to a property price premium. Such circumstances of 'stabilising (positive) transaction costs' may, for instance reflect information costs (see D'Arcy, 2006 on the role of intermediaries in the UK real estate markets) or the determination of exchange prices in a strictly regulated context (see Buitelaar, 2004, on the land prices in the Netherlands).

This alternative view contradicts the conventional wisdom in general economic theory as well as NEI. According to 'heterodox' claims it is not economic efficiency but economic security together with QOL that induces the most sustainable economic growth. Recent time-series evidence on a country level provided by Rothschild (2005) backs this up, and, Barry (2006) puts forward arguments that are in the same spirit, although using a more theoretical angle and cross-disciplinary approach. Let us next take a closer look at each of the arguments pro and con the essence of NIE.

Fisher and Jaffe, citing a World Bank study, note the significance of securing the property rights "in creating a stable and promising economic environment". Whilst this claim is exactly what one would expect from someone working for the World Bank, given the practices and ideology of that organisation, a credible position can be negotiated also from here. Namely, if we extend the argument beyond just property rights to involve all kinds of institutions, such as infrastructure plans and anti-corruption laws, we come to a position that is compatible with the alternative view. Another argument that easily generates consensus is the notion by Fisher and Jaffe about organisations possibly having "vested interests in certain institutional designs". Indeed, active institutions or just lock-ins may turn out effective in keeping a situation suboptimal from either efficiency or equity point of view. (One only needs to take a look at the succession of governments in those Central and Eastern European (CEE) countries, where the old socialist regime has made a timely comeback). Further, their notion about private rights being context dependent is also a neutral observation--although on a technical level to determine benefits and costs rarely is straightforward at all. Nonetheless, according to these authors, who cite Bertrand Renaud (World Bank), the context is favourable for all CEE countries. One is left wondering: in many (if not most) of these countries obstacles caused by corruption and backwardness are not surmountable using tools as simple as those propagated by the NIE community.

These being largely empirical questions, let us now take a look at the alternative view. Rothschild presents empirical material against "the simple neoliberal folklore" using a thirty-five year time-series of sixteen Western European countries, where relevant variables (inflation, unemployment, economic growth, government expenditure, trade union density and corporatism) are paired and compared so as to see the extent to which the conventional wisdom is valid. He concludes that "generalizations in general and some neoliberal articles of faith in particular rest on weak foundations or are altogether untenable".

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