The Persistence of Real Estate Cycles

The paper presents a model which attempts to explain the underlying causes of the prolonged cycles observed in real estate markets. In addition, the paper characterizes the features which make some property types more prone to such boom and bust behavior. The combination of demand uncertainty, adjustment costs, and construction lags leads to two phenomena which may help explain market persistence. The first phenomenon is the reluctance of owners to adjust occupancy levels, even in the face of large shifts in renter demand. The second phenomenon is the occurrence of periods of sustained overbuilding; the addition of new supply in the face of already high vacancy rates.