Understanding the Effects of Market Volatility on Profitability Perceptions of Housing Market Developers

Shahab Valaei Sharif (), Dawn Parker, Paul Waddell and Ted Tsiakopoulos
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Shahab Valaei Sharif: School of Planning, University of Waterloo, 200 University Ave. W., Waterloo, ON N2L 3G1, Canada
Paul Waddell: Department of City and Regional Planning, University of California, Berkeley, CA 94720, USA
Ted Tsiakopoulos: Canada Mortgage and Housing Corporation (CMHC), Toronto, ON M5J 1S9, Canada

JRFM, 2023, vol. 16, issue 10, 1-34

Abstract: Drastic shifts in prices and housing market trends in recent years, representing shocks to the housing system, have led many residential developers to pause or cancel their projects. In the already heated housing markets of the Greater Toronto Area (GTA), these supply frictions can have ramifications for affordability. Our study formulates a standardized “proforma” model of the profitability of a hypothetical condominium project in the city of Toronto, Canada, scheduled between 2019 to 2023, to explore the combined effect of developers’ price expectations and market volatility on developers’ decisions. Using the proposed proforma, we first identify the key drivers of development decisions. We then evaluate the impact of the expectation formation of key factors influencing perceived development profitability, including construction costs, sales prices, and interest rates, on the financial feasibility of potential developments. The results highlight that boundedly rational expectations can cause variations in profitability perceptions and potentially reverse development decisions in volatile market conditions. Our results highlight the sources of risk and uncertainty in development decisions, facilitating the recognition of possible solutions to mitigate these risks and increase affordable housing supplies. The proposed model can also enhance the realism of decision models in agent-based representations of land and housing markets.

Keywords: housing prices; land use and real estate market; real estate modeling; institutional economics analysis of the real estate market; price expectations; development proforma; construction costs; interest rates; housing supply; bounded rationality (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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