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On real cash flow, credit availa-bility, and A sset price inflation

On real cash flow, credit availa-bility, and A sset price inflation. Dennis Schoenmaker and Arno van der Vlist. University of Groningen, Department of Economic Geography. Motivation. Office market crisis. Credit influx. Credit available. Asset Value way to high.

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On real cash flow, credit availa-bility, and A sset price inflation

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  1. On real cash flow, credit availa-bility, and Asset price inflation Dennis Schoenmaker and Arno van der Vlist University of Groningen, Department of Economic Geography

  2. Motivation Office market crisis Credit influx Credit available Asset Value way to high 1991 1995 2001 2005 2008 Drop in M2 Rental

  3. Aim & Contribution 1) Credit availability, Asset prices, and Rental price Dynamics. • Ling et al, 2011 • Hendershott et al, 2010 • Englund et al, 2008 2) Whereas most contributions use appraisal based data, we use transaction based data for the asset and rental market.

  4. II=Assetmarket/ Asset price determination I= Space Market / Rent determination Rental value D = S PRICE = RENT/ cap-rate II I Asset Price M2 Stock III IV P = f(M2 RED) ΔS = M2 RED –δS M2 RED III=Assetmarket / Construction IV=Space Market / Supply response Review of Literature Credit and Asset prices Ling et al 2011 Brunnermeier, 2009 Rent dynamics Englund et al 2008 Hendershott et al 2010, 2002, 1999 Jennen, 2008 Wheaton et al., 1994, 1997

  5. Reviewof Literature (1) Asset price: 1) Chen (2001) found that availability of bank loans are significant in predicting movements in real estate assets (Taiwan). 2) Ling, et al (2011) found that credit availability is a significant determinant of Asset prices. Rent Dynamics: 1) Hendershott, et al (2010) found that the stock and office employment are significant determinants of the rent (London office market). 2) Brounen and Jennen (2009) found that the vacancy rate and office employment are significant determinants of the rent (Ten European Cities).

  6. Data sources, definitions, and descriptives Table 1- Data N x T = 17 x 12

  7. Timeseries

  8. Timeseries (1)

  9. Correlation matrix

  10. Empiricalmodel Simultaneous equation model: (1) (2) • Some assumptions: • The systems is stable if || < 1 . • The parameter shows the speed of return. • and denotes the coefficients of the determinants at lag length q.

  11. Timeseries test * Based on this outcome and the co-integration outcome we perform the empirical model (1) and (2).

  12. Results Table 4 - Estimation results for the dynamic rent model, corrected LSDV estimates ***, and ** denote significance at the 1 percent, and 5 percent levels, respectively.

  13. Results (1) Table 5 - Estimation results for the dynamic asset model, corrected LSDV estimates ***, and ** denote significance at the 1 percent, and 5 percent levels, respectively.

  14. Conclusion + futureresearch Main findings: 1) Credit availability is an important determinant of Asset price, whereas the Rent is also an important determinant. Furthermore, rising asset price not related to rising rents can be described as asset price inflation. 2) The rent equation gives similar outcomes as the Hendershott and Brounen/Jennen approach. Furthermore, we find higher price elasticities because of the markets we include in the model, the income elasticity is almost equal. Further research: * Incorporation of measures of transaction activity as proposed in Ling et al. (2009) to measure regional market liquidity.

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