Real Estate Prices in Production Economies

The aim of this study is to develop a general equilibrium framework linking real estate prices to the real economy. The model is evaluated in terms of its ability to explain: (i) the high volatility of residential real estate prices, (ii) the fact that commercial real estate prices are more volatile than residential real estate prices, (iii) the low volatility of residential rents. This study finds that a production economy model, allowing prices and quantities to be endogenously determined, is able to explain the puzzling volatility of real estate prices while capturing the main empirical regularities of the business cycle.