Housing price trends and their volatility have become one of the major determinants of wealth and social inequalities, and one of the major factors influencing sustainable economic growth. Despite this, mainstream housing economics has so far failed to capture important factors of price volatility. This project aims to demonstrate the utility of new conceptual framework, called pragmatic socioeconomics, for obtaining a better understanding of (housing) markets and price
trends. Specifically, we will study (using quantitative and qualitative sociology) the impact of (1) intergenerational resource transfers within the family and (2) investment behaviour of small residential investors on housing demand and housing price trend (volatility). We will also (3) empirically test different ways how to reliably measure (irrational) housing market sentiment and study its impact on housing demand. The incorporation of sociology into economics can reveal
the hidden causes of current and not yet understood trends in the market and housing price developments.

Grant project supported by the Czech Science Agency. The project started in 2023 and will be finished in 2025. The head of the project is Martin Lux, Ph.D.

State of the art and literature review

In the last two years (during the Covid-19 pandemic and the economic slowdown it caused), the housing market entered a phase that has become extremely difficult to understand solely with the tools of mainstream economics. Housing prices rose significantly; leaving changes in two major market fundamentals, income and rent, far behind them. In 2021, for example, in the 16 major OECD countries for which the longest residential property price indices exist in the OECD database (OECD 2022), house prices increased so disproportionally to household incomes that the deviation of the price-to-income ratio (P/I) – i.e. the ratio of average (median) household income to average (median) house price – from
its long-term linear trend for this group of countries increased by a record 52%. Disproportionate growth in house prices was also evident from a gross investment perspective, which is measured indicatively using the price-to-rent ratio (P/R), i.e. the ratio of average (median) rent to average (median) house price: for the same 16 OECD countries, the deviation of value of P/R from its long-term linear trend increased by a record 22% in 2021, more than double the figure in previous years. Increasing house prices gave rise to a discussion about potential house price bubbles forming in housing markets (Bergman, Sorensen 2021; Bago et al. 2021) that could endanger economic recovery and sustainable growth; and led to studies about resulting social inequality – between homeowners and tenants, old and young, wealthy and poor, and centre and periphery (see, e.g., Forrest and Hirayama 2009).

Naturally, we cannot draw far-reaching conclusions from how housing prices have developed in just two years. However, (1) this period was only an intensification of a long-term trend that has been seen since the end of the Global Financial Crisis (GFC) of housing prices rising disproportionately to household incomes, leading to a situation that has begun to be called the urban housing affordability crisis (Wetzstein 2017). Moreover, (2) the intensive price boom occurred in the time of a pandemic, an economic slowdown, and increasing uncertainty, and that in itself is unexpected and unique. Therefore, (3) expert predictions about the housing market have become largely unreliable. For example, although expert predictions published in the British media expected a modest rise in house prices (ranging from 2% to 3%) in the UK for 2020, housing prices in reality jumped by 6-8%, and although most expert predictions for 2021 envisaged an even more modest increase in housing prices (due to the end of the temporary abolition of the stamp duty and the delayed impact of the pandemic on the housing market), housing prices rose year on year at a rate of 8-11%, a record high for the last 15 years. Like in the UK, in the United States as well experts’ predictions have fallen short of reality: for 2020, most predictions published in the media expected housing prices to rise by 3-4%, while in fact housing prices rose by
more than 10%. Although the predictions for 2021 were more optimistic (mostly estimating growth in the range of 5-10%), the real growth in house prices was two to three times higher than was expected.The gap between the expectations of experts and real development even in countries with a long-term tradition of housing price research represents a real challenge for standard housing economics.

We cannot, of course, assess the market predictions that are published in the media without any further details. However, the weakness of econometric predictions for housing markets appeared even in academic studies. Economists have already admitted that the housing market is not fully efficient because excess short-term price volatility signals that the available information is insufficient to adjust prices. Property prices tend to be positively autocorrelated. Traditional housing economics first explained this as resulting from the specific features of the housing market, such as spatial fixity and the durability of housing, high transaction costs, housing supply restrictions and inelasticity, mortgage
regulations, or other state interventions (Maclennan 1982). Malpezzi (2005) highlights the investment aspect of housing purchases, which attracts professional short-term speculators and accelerates any boom in housing prices. Behavioural economics then extended speculative motivations to apply to all homebuyers (Schiller 2000). The fact that homebuyers irrationally extrapolate past experience (price increase) as the best predictor of the future and do not base their price expectations on a rational analysis of fundamental trends results in myopia and a ‘rationality bias’ and, consequently, in market inefficiency (Nofsinger 2012). A number of economists have proved that ‘irrational’ housing price expectations exist, and they have confirmed that these expectations had an influence on the excess volatility of housing prices. Case et al. (2011) wrote that Americans had turned into a ‘nation of speculators’.

However, despite an attempt by econometricians to incorporate both traditional sources of inefficiency and irrational backward-looking expectations about future housing price trends into their market models, even this improvement proved insufficient to provide any reliable warning of the threat of instability and price swings in the period before the GFC (see, e.g., Himmelberg et al. 2005, Cameron et al. 2006, Girouard et al. 2006). As Nobel Prize laureate Schiller (2007) has pointed out, the methods of mathematical economics that are used to assess the trends on housing market have lost their reliability. In short, it is housing price trends and their volatility that have become one of the major determinants
of wealth and social, intergenerational, and spatial inequalities, and one of the major factors influencing sustainable economic growth in the developed world. Understanding housing price trends and the behaviour of housing market agents means understanding significant parts of recent and future social and economic global changes. Despite this, mainstream housing economics has so far failed to capture important factors of price trends and their volatility. The incorporation of psychology into mainstream economics had the effect of confirming homebuyers’ irrational backward-looking price expectations, which are an important source of market inefficiency, but this finding was not sufficient to capture all
sources of price volatility.

This fact has led some academics (mostly those with a background in sociology) to thoroughly criticise how the free housing market functions. There is a growing body of literature that blames (neoliberal) housing policies and/or free housing market solutions for the recent affordability crisis and is calling for stronger state intervention. Colenutt (2020) accuses the UK property lobby of being a ‘hidden reality behind the housing crisis’. According to him, despite enormous subsidies from the state, there has been no improvement in housing affordability and state policy has only contributed to the endless rise in land and housing prices, from which developers, construction companies, landowners, and the mortgage industry have profited most. Jacobs (2019) argues that the current housing crisis in the US, the UK, Australia and other countries is the result of a decline in public housing provision. Similarly, Clapham (2019) blames neoliberal policies based on privatisation, marketisation, commodification, financialisation, and individualisation as responsible for growing housing inequality and decreasing housing accessibility. Wijburg (2021) therefore has proposed a new housing research agenda: research aimed at reforming financial markets to reduce their financialisation and policies to support the construction of public and affordable housing. However, the accusations directed against the free market may be unfair and requests for policy reform one-sided, as they mostly remain unsupported by economic theory or empirical proof. These critical studies often ignore achievements made by the liberalisation of housing and mortgage markets, as well as remain silent about troubles connected with administratively distributed housing systems – for example, in former socialist countries where public housing solutions were strongly favoured before 1990.

These sociological critiques of housing markets, though relevant, do not create the interdisciplinary bridge to mainstream housing economics that is necessary in order to better understand recent market failures. They are more a rejection of economics (the prevailing economic theory and its assumptions) than an attempt to find a compromise between the perspectives of two disciplines. The growing need for interdisciplinary research seems, paradoxically, to have therefore been accompanied by an increasing delimitation of disciplines, and even so-called imperialism, both economic and sociological. In our project we intend to show that an interdisciplinary synthesis is possible and that it can moreover shed
light on important facts on this issue. Therefore, we want to empirically test a conceptual framework that was inspired by the successful application of cognitive psychology to economics – namely ‘pragmatic socioeconomics’. This concept is not in line with recent critical studies in economic sociology, but it represents a more effective bridge between housing sociology and economics. We introduced it in the Focus article published in Housing, Theory and Society (Lux, Sunega 2022a,b) as the outcome of our study of the impact of the tenure norm on home-buying behaviour and the consequences that such behaviour has for the operation of the housing market and housing prices. This project aims to demonstrate the broader relevance of this conceptual framework and its potential utility for obtaining a better understanding of (housing) markets and price trends. However, this does not mean that it can produce better knowledge than mainstream economics or critical sociology. Rather, it represents a methodological alternative that may reveal facts that the separate approaches of one or the other discipline are not able to reveal.

The research context

Housing economists have recently devoted much more attention also to the beliefs and sentiments of market actors (e.g., Abildgren et al. 2018, Dong et al. 2021, Hui & Wang 2014). However, in economics only a ‘beginner level’ of sociology is applied, in terms of the use of methods and theory, and it is not uncommon to find only the response frequencies to a single question in a questionnaire survey being used in this kind of economic research (e.g., Abildgren et al. 2018). It is clear that economists do not overlook the social, emotional, and moral complexity of the present-day buyer, but they want to incorporate sociology into their models ‘in their own way’. Real sociological insight and a diverse use
of methods are lacking.

We address this problem through what we call ‘pragmatic socioeconomics’. The full details of this concept are described in Lux et al. (2022a, b). Inspired by the successful applications of cognitive psychology in major economic studies we distinguish – much like what psychologists have done in behavioural economics (Tversky, Kahneman 1983) – economically rational justifications from other (economically irrational) justifications for market decisions that are referred to as heuristics. Like behavioural economics, we interpret the latter as a rationality bias, and we assume that this bias may explain real market failures and inefficiencies. This new concept was derived from our study of the impact of the housing tenure norm (which says that homeownership, if affordable, is always a better option than renting) on the tenure choice of young first-time buyers. We demonstrated that an existence of this norm may lead to irrational (normative) market decisions, and consequently to a rationality bias and market inefficiency. We confirmed that cultures in which this norm is strong are prone to higher income elasticity of housing prices and higher short-term housing price volatility, i.e. market failure.

In this project we would use the concept of pragmatic socioeconomics to focus on three other important social phenomena that may help to explain the recent unusual house price trends: namely, the impact of (1) intergenerational wealth and financial transfers within the family (intended for housing acquisition by young adults) and (2) investment behaviour of small (lay) residential investors on housing demand and price trend (volatility). We will also (3) empirically test different ways how to reliably measure (irrational) housing market sentiment and study its impact on housing demand and the socioeconomic determinants of its variance. In our study, we may also touch on the problem of the reasoning of
developers faced with rising housing prices and thereby contribute to the discussion of the role of housing supply (and its financialization) in the recent affordability crisis, but this subject will remain outside the main focus of the project because of personal and time project limitations.

We will conduct our research in the Czech Republic, a country that (1) was the record-holder in annual house price growth in the EU in 2021 (and in some previous years); (2) where the homeownership rate has significantly increased since 1990 and homeownership became a strong social norm; (3) where there are enormous intergenerational financial transfers; and (4) where residential investments have sharply increased in the last few (pandemic) years and most investments are coming from small rather than institutional investors. However, the results from the Czech case will be used for analysis of comparative data in order to generalise the findings made in the Czech context to apply to a broader number of countries (see details in the next section).

Research objectives

The main goal of our project is to analyse (using quantitative and qualitative sociology) the influence of (1) intergenerational within-family wealth and financial transfers, (2) the behaviour of small (lay) residential investors, and (3) diverse market sentiments (including price expectations) on home-buying and lay investment decisions, and thereby on housing demand and housing price trends (volatility).

In the less financialised markets in post-socialist countries, where renting is insecure and the (residual) welfare state is weak, the most logical solution for coping with increasing housing prices would be for intergenerational resource transfers to play a bigger role (Lux et al. 2021). However, we do not know to what extent these transfers may themselves add to price booms and short-term price volatility. In other words, financial transfers increase the purchasing power of young first-time buyers and may thereby contribute to the deviation of price-to-income from the long-term trend. They could act as a ‘bubble builder’ if provided with no account for the given market (price) situation. As for the tenure norm, an
informal transfer norm that says that parents should give their adult children a substantial financial transfer when they buy their first housing may weaken tenure substitution and thereby cause a protracted housing boom (and ensuing bust). In-kind transfers (i.e. transferring flats) lead to reduced market supply, while financial transfers (i.e. transferring money) lead to an increase in effective market demand. The size and type of the transfers probably affect the number of market transactions, price levels and trends.

We would like to study the impact that within-family transfers have on the market and prices on both the national and the international level. For national-level research, our key research questions are:

(RQ1) What are the main motives behind the transfers parents give to their adult children? What determines the size of a transfer? What is the interplay of social (normative) and pure economic factors that influence transfer-giving and how do these factors differ according to the main socioeconomic characteristics of transfer-givers?

(RQ2) Do parents who help their children with transfers take into account the situation in the market at the time? What are their market (price) expectations and how do they justify them? How sophisticated is their understanding of the market? Do they consider alternative housing solutions for their children (and thus also about providing transfers for other purpose than housing acquisition)?

(RQ3) Are the differences observed between regions or market segments in the average size or prevailing type of within-family transfer associated with regional or market-segment differences in housing prices and affordability levels (trends, volatility)? If so, is this association still observed even after controlling for other potentially significant factors (e.g., regional socioeconomic factors)?

For the international level of analysis of within-family transfers, we will ask following questions:

(RQ4) Are the differences between countries in the price-to-income and price-to-rent values and trends (or in the value/trend of their deviation from long-term geometric average) associated with differences in the average size (typical form) of transfer (using, alternatively, also a proxy in the form of the share of outright/mortgaged ownership in the population (among young people) out of the total number of all (young) owner-occupiers)? If so, is this association still observed even after controlling for other potentially significant factors for which data are available (e.g., housing supply elasticity, mortgage market liberalisation, housing tenure structure)?

The financialisation of housing is reflected, for example, in the behaviour of small (lay) investors in the housing market, who increasingly buy apartments purely for investment purpose. Although lay investors represent the most important type of residential investors in many societies, their motives, strategies, and attitudes remain under-researched by sociological studies. Big institutional investors have been the subject of some studies in Western countries (e.g., McKenzie, Atkinson 2020; García-Lamarca 2021), but the reasoning of small (lay) investors has received little to no attention from sociologists to date.

Our main research questions for the national-level analysis will be the following:

(RQ5) Are Czech lay investors motivated to invest in housing by the financial profit that can be gained from rent or capital gains, or are their purchases primarily prompted by their adherence to the transfer norm (i.e. buying properties for their children)? How sophisticated are their investment decisions? What kind of analysis do they conduct and what are their key motives and information sources? What are their market (price) expectations and how do they justify them? What types of lay investors can we distinguish based on motives and investment strategies and what is their socioeconomic background? What is the interplay of social (normative) and purely economic factors that influence residential investments and how do these factors differ according to the investors’ main characteristics?

For the international level of analysis of investment behaviour, we will ask the following questions:

(RQ6) Are the differences observed between selected countries in the price-to-income and prince-torent values and trends (or the deviation of values and trends from the long-term geometric average) associated with differences in the share (change in the share) of institutional (small) investors out of the total residential investments (the total amount of private rental housing)? If so, is this association still observed even after controlling for other potentially significant factors for which data are available?

The behaviour of both home-buyers and home-investors is closely connected with housing market sentiment. There are two ways in which to create a sentiment index: one based on a questionnaire survey and the other on the development of the main market parameters (transactions, housing construction, land prices, or housing credit supply). We will focus on the first (the sociological) approach and employ a set of different survey questions about (price) expectations and other attitudes in order to measure mutual associations between them and ultimately suggest the optimal measure of housing market sentiment. We will also attempt to answer the final group of research questions:

(RQ7) What socioeconomic or demographic variables explain the variability in housing market sentiment? How is sentiment connected with the subjective labour and income prospects of respondents, their demographics (gender, family status) or house price expectations? What is the interplay between social (emotional, normative, status) and purely economic factors in the formation of sentiment?

The second goal of our project is to demonstrate the merits of a theory and methods derived from pragmatic socioeconomics for better understanding of (housing) markets, and thus verify the contribution of this kind of interdisciplinary research to the analysis of market failures. The norms affecting the behaviour of market actors are still just one possible area of inquiry for pragmatic socioeconomics: economically irrational behaviour in the market can also be caused by racial or sex prejudices or by media campaigns, including the as yet under-researched phenomenon of social media influencers. Housing is moreover just one of the possible markets to which pragmatic socioeconomics could be applied. This project should justify such potential expansions of the concept.

The third goal of the project is to better inform policy about relevant measures to tackle the affordability crisis and increasing housing prices (volatility). There may be policy measures that are going to meet policy goals more precisely and effectively than the complete rejection of free market solutions – for example, through the regulation of housing (investment) demand via different tax measures. Policies also should not aim to make the decisions of market actors more “rational”. Instead, it is necessary to respect the complicated nature of home-buying and investment reasoning but to count on the irrational part of this when suggesting relevant market regulations. Policy recommendations will be discussed with responsible policy makers during the joint workshop.

The fourth goal of the project, which is also connected to the project’s main goal, but goes beyond its scope, is to survey housing attitudes and preferences of Czech citizens through quota questionnaire survey of a sample of the Czech population - Housing Attitudes 2023. While in many advanced countries research on the volume and quality of the housing stock (through a census or large representative survey) is accompanied by research on attitudes, plans, and preferences regarding housing (e.g. the House Condition Survey in the UK, the Household Demand Survey in the Netherlands, and Enquete Logement in France), the Population and Housing Census in the Czech Republic, the results of the most recent of which will be available in 2022, is not accompanied by this important dimension of research. However, in order to make decisions about the country’s housing policy, it is important to know not just the current situation but also potential trends as reflected in the preferences of citizens.

Consequently, the questionnaire survey will not just serve to fulfil the main scientific goals of the project, i.e. to provide necessary data on transfer-giving, the history and plans of residential investments, sentiment measurement (scales), and housing price expectations, etc. The survey will also amplify the findings on the housing stock (‘hard data’) obtained through the 2021 census with findings about the level of housing satisfaction, attitudes towards the quality of housing, and attitudes towards the role of the state generally and towards housing policy tools in particular. The survey will include questions on possible shifts in housing preferences resulting from the Covid-19 pandemic, the energy crisis, or the
threat of war (due to the war in Ukraine), and we will touch on the topics of social housing and housing for refugees. Respondents will also be asked about plans to move in the coming years, the reasons for the planned move, and barriers to moving, even in the context of labour migration.

An important fact is that the Housing Attitudes 2023 survey constitutes a follow up to the surveys that we carried out under the title Housing Attitudes in 2001 and 2013 in relation to the preceding censuses. Data from this survey were used to prepare a number of academic articles and monographs (e.g. the Housing Standards series of publications), facilitated an international comparison of housing attitudes (given that the formulation of questions was similar to surveys in France, the UK and the Netherlands), and served as a source of information for state administration (Ministry for Regional Development, Ministry of Labour and Social Affairs, Office of the Government) and the private sector (savings banks,
mortgage banks, professional landlords, housing developers). Publications based on data from these surveys are used as teaching material (Masaryk University, Palacky University, University of Economics). They have received a strong response from the wider public and have had a significant impact on the formulation of housing policy in the Czech Republic. The data will be made freely available through the Sociological Data Archive of the Institute of Sociology at the end of the project.

Relevance of the project

The current housing affordability crisis is leading to increasing social stratification in society divided along the lines of housing conditions and tenure. Despite the need for interdisciplinary cooperation between sociology and economics, which could lead to a potentially more accurate definition of the causes of market failures, both disciplines remain closed within their own paradigms (as opposed to ongoing cooperation between economics and psychology). This project intends to change this and empirically demonstrate the usefulness of a new methodological concept of interdisciplinary research based on pragmatic socioeconomics, which could also find application outside the field of housing. The
incorporation of sociology into economics can reveal the hidden causes of current and not yet understood trends in the market and housing price developments, reflected in growing price volatility and declining housing affordability. These trends have significantly weakened the reliability of economic predictions and made it necessary to look for alternative ways of understanding of markets.

Methodology

In order to answer the research questions on the national (Czech) level of the analysis of transfergiving and lay investments (RQs 1, 2, 3 and 5) we will use income/salary statistics/data from the Czech Statistical Office (CSO), 2021 census data (available since 2022), secondary data from the Czech EU-SILC survey (2020-2023) and the Czech Household Panel Survey (2015-2018), and especially data from Housing Attitudes 2023 and accompanying qualitative research. EU-SILC is a representative sample survey (where households and individuals are selected through multi-stage random sampling) in the form of a four-year rotation panel, and it includes detailed information on Czech household incomes, expenditures (including housing expenditures), and wealth (including residential wealth). The Czech Household Panel Survey (CHPS) is also a panel survey of Czech society; there have been four waves of the survey (the first wave was conducted in 2015, the fourth in 2018). The survey’s main advantages include its surveying of all household members, the panel character of the study, the broad thematic coverage, the large sample size, and the very detailed information it collects on the housing situation and the history of transfer-giving (intended for housing acquisition) within the family. Data from the EU-SILC 2020-2021 and all the waves of the CHPS are already available to us, and we have experience working with these data from our previous studies.

Given that our research questions cannot be adequately answered using only secondary data, we will conduct our own Housing Attitudes 2023 survey on a sample of approximately 1,400-2,000 respondents selected using quota sampling (combined quotas will include gender, age, education, housing tenure). The interview will take an estimated one hour and the survey will be carried out by public opinion research agency that will be selected in a tender. However, this survey will serve not only to answer the main RQs in the project but also to provide information about the preferences, attitudes, plans, and strategies of Czech households in the field of housing and housing policy, and about the dynamics of
these plans, attitudes, and so forth, when compared to the results of previous surveys conducted in 2001 and 2013. It will be of use to other academics, policy-makers, and students pursuing their own research goals. The data from this survey, like the data from the other above-mentioned surveys, will be analysed in order to answer the RQs (especially RQ 1, 3 and 5) in reference to hypotheses formulated in advance (based on each research question) and with the use of quantitative methodology: linear or logit regressions and principal component (factor) analysis applied in SPSS and Stata software.

A quantitative analysis of data from large surveys is usually unable to uncover the significant qualitative contextual variables behind transfer-giving or investment behaviour. Consequently, qualitative sociological methods (interviews) will play an important role in the project’s methodology. We have chosen in-depth interviews as the best way to study motivations. In the interviews we will also employ original verification and laddering questioning. The purpose of verification questioning is to find out whether what appear to be the economically rational motives for transfers/investments (benefits, costs, revenues, losses, risks, etc.) that respondents state are really based on a knowledge of the facts and on
information they have collected and on the results of his/her analyses and calculations – we will therefore use questions like ‘How do you know that's true?’, ‘What information did you find and gather, or what calculations and verifications did you do before you came to this conclusion?’ The purpose of laddering questioning is to find out the core motives behind transfers/investments – thus the questions ‘why’ or ‘why do you think that this is so important’ will be used for any stated motive until we reach the point where no further explanation is possible/needed. We expect to conduct 12 interviews (six among transfer-givers and six among small investors). Using purposive sampling, we will put together a sample
of respondents with different gender, urban/rural, education, and age status characters. They will be contacted through flyers, ads, on Facebook, and using the snowball method.

In order to answer the research questions on the international level of the analysis of transfer-giving and lay investments (RQs 4 and 6) we will use international data from the EU-SILC survey (2018-2021), the Household Finance and Consumption Survey (HFCS, conducted by the ECB) and OECD analytical house prices indicators (OECD 2022). International EU-SILC surveys (until 2019) and OECD data have already been secured, and we have extensive experience with analysing these data for different purposes. The HFCS collects household-level data on households’ finances and consumption; it includes questions on real assets and their financing, other liabilities/credit constraints, private businesses, financial assets, intergenerational transfers and gifts, and consumption and saving. Especially unique is the information on intergenerational within-family transfers. Data from three waves (2010, 2014 and
2017) are available so far; and they are provided free of charge by the ECB. Transfer-giving data will be derived from the HFCS; data on the share of outright/mortgaged homeownership from the EU-SILC and the HFCS; data on the housing tenure structure from Housing Europe (2021); data on housing supply elasticities from Cavalleri et al. (2019); and the features of mortgage markets (and their regulations) from Poghosyan (2020) and van Hoenselaar (2021). The share (and change in the share) of institutional (or lay) investors out of the total number of residential investments will be derived from the OECD’s Economic Outlook Database (like in Kohlscheen et al. 2018).

In order to develop an optimal measure of housing market sentiment we will use special batteries of questions from the Housing Attitudes 2023 survey, and then verify the relevance of this measure in depth during the individual interviews with both transfer-givers and investors. We will employ scaling and principal component (factor) analysis, the Cronbach’s Alpha model, the Split-half model, and Parallel models in order to assess different measure outcomes. Finally, we will use regression models to answer RQ 7 on socioeconomic determinants of sentiment variability.

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