10 Takeaways from the AREUEA Conference (Cambridge)

The MCRE team (almost) collectively attended the International AREUEA Conference in Cambridge. An excellent, well-attended (and well-organized) academic conference, with many practical insights. Here are 10 takeaways from the extended MCRE team.

1. Biodiversity regulation will have a big impact on firms and investors (Nils Kok)

It may not be a topic that’s very familiar to you, but biodiversity is an increasingly important element to consider for real estate development and investment. And that goes much beyond beehives and green roofs: EU regulation mandates “no net land take” by 2050. That means all new development should either be on sites that are already in use for development, or be “offset” by land that is given back for the purpose of green space. A paper by Etienne de l’Estoile of the Bank of France investigates which sectors are the largest land users to begin with, and which sectors are likely to be most affected by the new regulations (which come into play in a staggered manner, leading to intermediate regulation on greenfield land use as early as 2030). The leisure sector, but also public services (e.g. waste-water treatment plants) are particularly vulnerable to increasing land prices. But consequences go beyond higher cost of business: for newly established firms, acquiring real estate will be costly, leading to lower ownership of real estate and more limited access to credit. This is definitely an interesting paper to read (or, even better, look at the presentation).

2. The place of your home affects labor market outcomes (Linde Kattenberg)

Rent control can serve as a means to enable lower-income workers to live closer to areas with high job opportunities. What happens when they suddenly lose these rights, and are required to move? Isaac Hacamo and his co-authors from Indiana University examined a unique situation in Portugal where only individuals older than 65, living in the same home since before 1990, remained eligible for rent control. In the case that the older family member passes away, the rest of the family is forced to move and is no longer eligible for rent controlled housing. The authors find that this reallocation is mostly negative for earnings of low-income workers, who are forced to move to the outskirts. This was especially challenging in cities with high public transport costs, as workers were forced to seek new jobs in their new area, which often resulted in mismatches due to the smaller labor market. While the removal of rent control provided higher benefits to landlords and decreased distortions in the rental market, it adversely impacted the income and job opportunities of lower-income workers. The authors propose that reducing public transport ticket prices could be a beneficial measure from a distributional perspective.

3. Foreign home buyers overpay for houses that are exposed to sea-level rise (Alexander Carlo)

From all the fascinating papers that were presented at this year’s AREUEA International conference in Cambridge, the paper by Chakrabortiy and Getez (2021) stuck with me the most. The authors find that information about sea level rise in La Manga, Spain, caused an immediate and persistent 5% to 10% drop in housing prices. In itself, I did not find this result surprising, as other studies have found similar results in other geographical regions. What struck me the most is that the authors find evidence that foreign buyers, seemingly unaware of these risks, were overpaying for houses in the region, while locals were selling theirs. This study highlights the importance of property buyers (both commercial as residential) having access to information about climate exposure. The paper is worth the read! Access here: link

4. Pandemic-induced changes in consumer preferences for housing (Minyi Hu)

Has there been a shift in housing demand, from urban to suburban areas, reflecting post-COVID-19 housing market dynamics? Using transaction data from the Singapore public housing market between January 2018 and December 2021, along with headline texts' keywords from online listings, a paper by Jieun Lee and Kwan Ok Lee (2023) attempts to answer these questions by analyzing the dynamics of online listing keywords and housing buyer behavior in the post-pandemic period and reveals noteworthy trends. Housing units situated on higher floors and with more rooms experienced significant increases in transaction prices, while properties closer to public transport and the central business district witnessed reduced price premiums after COVID-19. Moreover, the text analysis of listing headlines employing natural language processing (NLP), which calculates the share of each keyword's frequency out of the total frequency sum for each year, demonstrated that relevant keywords related to higher floors and larger sizes revealed trends earlier than transaction-based data, or at least in a timely manner. The research findings underscore the practical implications of using online listing data to forecast changes in housing demand and evaluate real estate market trends.

5. Are energy efficiency expenditures worth it, for property owners? (Alex Sun)

Energy efficiency in the real estate market often comes with a price premium – buyers and tenants have been shown to pay more for properties with better EPC ratings. However, obtaining a good EPC is not free, leading us to question whether the investment is worthwhile for property owners. A study conducted by Robert Hill, Norbert Pfeifer, and Miriam Steurer from the University of Graz offers valuable insights. Interestingly, it was found that for property sellers, an extra $100 investment on EPC improvements does not translate into a $100 increase in the selling price. In fact, the cost of EPC-recommended improvements is only partially capitalized in property prices: 84.4% for flats, 59.4% for semi-detached and terraced houses, and 59.3% for detached houses. The gap can be attributed to several factors. But its presence means that, at least in the short term, there must be additional incentives motivating property owners to enhance energy performance – of course, reduced energy expenditures is one of them.

6. Local banks reduce lending less than “outside” banks after wildfires (Dongxiao Niu)

Climate risks and their impact on the real estate market are currently sparking lively discussions at the AREUEA conference. Papers are exploring intriguing questions like - "Do climate disasters drive down property values?" and "How do such events affect the performance of commercial properties in terms of cash flow and occupancy?" Digging deeper, the discussions are also focusing on the lending market's responses and formulating strategies to cushion potential future losses due to environmental shocks. An interesting study by Alvarez et al. from the IESE Business School and Bank of Spain takes a closer look at post-wildfire lending behavior in Spain. They examine the contrasting reactions of local banks and those from outside the area, along with the impact on opaque firms compared to others. The study reveals that information accessibility played a major role in credit allocation following a wildfire. Local banks curtailed their lending less aggressively than outsider banks, given their better access to information. The inference is clear and impactful: as climate change continues to advance, its effects on real estate and financial sectors will require increasingly strategic adaptation, incorporating a deeper understanding of local context and accurate risk evaluations. As the climate evolves, so too must our strategies and responses.

7. Do out-of-town buyers, with plenty of cash, inflate local housing markets? (Juan Palacios)

Extensive coverage has been dedicated to discussing the impact of immigrants from wealthier cities or countries on driving up housing prices in more affordable markets. For instance, a recent interview by Linde Kattenberg in the Dutch news shed light on the consequences of the influx of Amsterdammers into the Limburg housing market (see link here). While this issue has garnered attention by the academic community, the factors underlying the changes in local housing prices have yet to be empirically tested. A new working paper authored by Gregor Schubert from UCLA has brought fresh empirical evidence to the forefront. The study compiled a comprehensive dataset tracking migration patterns of hundreds of thousands of households in the US during the 2000s and 2010s. The findings of this paper reveal an interesting trend: workers seeking more affordable housing options in budget-friendly cities tend to overbid for their new homes. They do so by using the equity gains in their original home to secure a house in the new market. To establish causal spill-over effects, the author employed the network structure of inter-city migration in the US. The results indicate that a sustained 10% increase in house prices in a particular city leads to a significant 6.3% rise in house prices due to the inflow of immigrants. These insights shed new light on the complex dynamics between housing markets, migration patterns, and their impact on local prices. The research underscores the need for local policymakers to consider migration trends when addressing zoning and the design of housing affordability policies.

8. A neighborhood is more than the sum of its homes (Jonas Wogh)

Amenities matter - a lot! The value of a neighborhood is not only driven by the average commuting time to a central business district, but also by the availability of shops, restaurants or cafés, and the proximity to water and green spaces. This is no news, of course. Quantifying the importance of different amenities has proven tricky, however.

Shawn Rowlin and co-authors present an interesting approach to show the importance of amenities. They study the closure of very-large (big box) retail shops in the United States, and how it affected the surrounding neighborhood. First of all, if a flagship store closes its doors, so do many other small retail and service establishments. This highlights that we must think of neighborhoods as integrated networks, where the total is more than the sum of its parts. Second, the consequences of such a loss in local amenities are reflected in house prices. According to the authors estimations, the loss of commercial activity due to retail closings leads to a 1-3% decline in transaction prices, depending on the severity of the initial shock. Studies like this provide great insights into how neighborhoods are shaped by commercial activities. This matters greatly for urban planning. In our current affordability crisis, there is an understandable desire to create as much new living space as possible - as fast as possible. However, it is equally important to make this new space desirable for owners and tenants. For this to be the case, providing amenities is indispensable.

9. Why policies for congestion pricing fail (Stefan Flagner)

Many large cities, including Paris, London or Los Angeles, have problems with congestion. These problems persist for more than two decades now and in some cities, it became worse over the years. Already in 2003, London introduced a congestion pricing system, but only after a long public debate and loud voices by opponents of such a system. The system which is also in place in Singapore, Stockholm and Milan charges an extra fee to car drivers when they enter the city at specific times of the day. The idea is to reduce the incentive for commuters to use the car and instead switch to public transportation systems which would ultimately reduce the traffic jams. The problem with this policy is that at first, it is very unpopular. Asking commuters to pay an extra fee if they don’t switch to public transport systems is clearly not a favorite election campaign topic. However, such a system leads to clear welfare benefits, including less congestion, cleaner air and generally a more attractive city environment. A working paper at the AREUEA conference (following on earlier literature on this topic) investigated why individuals oppose such a policy even though it can make them better off. It concluded that before introducing the policy, individuals often underestimate the number of people switching from car to public transport. Thus, they underestimate the effectiveness of the policy to reduce congestion. However, the paper makes another important point. Policymakers should use the revenues generated from the congestion pricing fees to subsidize public transport. Thus, at the same time, it becomes more expensive to commute by car, it becomes also cheaper to take the bus or train. This way, more commuters are better off with the policy implementation. The Swedes made a clever move to implement such a system with the support of the public. They implemented it for a 6 month trial period in Stockholm after which they held a referendum if the system should stay in place. Voters supported this system, even though before the trail started, a majority opposed it. The paper shows a similar picture for London in 2003. One month before the congestion pricing system was put into place in 2003, only 40 percent of voters supported it. However, one month after implementation, 57 percent of voters supported the system. To conclude, even if a policy has welfare benefits, voters might underestimate the gains at first. So a trial period can help change voters’ beliefs.

10. The distributional consequences of trade: Evidence from the repeal of the Corn Laws (Paulo Rodrigues)

The AREUEA conference included a session where economic history was combined with insights on topics that are relevant today. One such topic is international trade, a topic that is controversially discussed to this day. Of particular importance is the question of who are the winners and losers in changes in trade policies. Although economists are mostly in agreement that the liberalization of trade policies leads to higher living standards, a large number of empirical studies have pointed out that these increases are unequally distributed across the populations. The most recent example of a trade liberalization event is the so-called “China Shock” that happened after China entered the World Trade Organisation in 2001.

The authors of the paper “The Distributional Consequences of Trade: Evidence from the Repeal of the Corn Laws” discuss an event of trade liberalization in the United Kingdom (UK) in 1846. The paper discusses that during the French Revolutionary and Napoleonic Wars from 1792-1815, the UK was basically continuously at war with France. In addition, the continental blockade of Napoleon largely prevented the trade of wheat with the traditional trading partners, namely Prussia and Russia. As a consequence of this, the price of wheat increased substantially, benefitting rural landowners and harming workers, manufacturers, and merchants. After the wars, the government passed the Corn Laws in 1815, which defended the status quo after the wars and protected the beneficiaries of increased corn prices. Since domestic harvests from 1837 onwards were poor, a movement was formed to repeal these laws, leading to the abolishment of the laws in 1846. The paper shows that the repeal of the laws led to a population movement from rural to urban areas, decreasing in agricultural activity, and a change in the relative valuation of land and buildings.

11. Bonus insight: Informational clutters (Dirk Brounen)

IXP was one of many new words and terms I encountered at this year’s AREUEA international meeting. An IXP is an internet exchange point, and new research by David Ling and Andy Naranjoshows that office locations near these IXPs can charge higher rents and prices. Why? Because smooth and speedy information flows matter.

That these information flows matter more and more, was also part of Colin Lizieri’s keynote speech. Colin taught us how imperfect information transfers and processes can distort the capitalization of energy efficiency. But the conference provided many more examples of how relevant information is often not properly converted into prudent decision-making. Information on increasing flooding risk, rental vouchers, mortgage duties, and even on public transport subscriptions were discussed, and every time the authors concluded that consumers failed to make the sound decision. Hence, in line with Colin’s plea, I would like to have a closer look at the IXPs within the real estate value chain. More specifically the role of real estate agents and mortgage advisors. How well do they transfer and translate relevant information to their clients? And how can we enhance the quality of this transfer of information?