A note on external institutions: for housing studies students

A note on external institutions: for housing studies students (information from perplexity.ai) [a preliminary literature review exercise]

My question 1: "What is the topic of external institutions in institutional economics all about with reference to the subject of housing market?"

The reply: "Understanding External Institutions in Institutional Economics: Focus on the Housing Market

Overview of Institutional Economics

Institutional economics examines how institutions—defined as the "rules of the game" that govern social and economic interactions—shape economic behavior. This field includes both traditional institutional economics, which emphasizes the evolutionary processes and legal foundations of economies, and new institutional economics (NIE), which integrates insights from neoclassical economics to analyze the role of institutions in economic performance14. NIE, coined by Oliver Williamson, focuses on transaction costs, property rights, and governance structures, considering how these factors influence economic outcomes and efficiency1.

Role of External Institutions

External institutions refer to the broader frameworks that influence individual behavior and organizational actions beyond immediate market interactions. In the context of the housing market, these institutions can include:

• Legal Frameworks: Laws governing property rights and contracts are crucial. Clear, enforceable property rights encourage investment in housing by providing owners with incentives to improve and maintain their properties3.
• Regulatory Bodies: Government policies and regulations impact housing supply, affordability, and market dynamics. For instance, zoning laws can restrict development, affecting housing availability and prices2.
• Cultural Norms: Societal attitudes towards homeownership versus renting can shape market behavior. In cultures where homeownership is highly valued, demand for houses may drive prices up significantly5.

Impact on the Housing Market

The interaction between external institutions and the housing market manifests in several ways:

1. Transaction Costs: High transaction costs can hinder market efficiency. For example, difficulties in enforcing contracts or obtaining financing can deter potential buyers or investors from entering the housing market37.
2. Institutional Investors: The presence of institutional investors can alter market dynamics. While they may provide liquidity and stability post-crisis (e.g., after the 2008 financial crisis), concerns arise when they dominate purchases, potentially outbidding individual buyers and driving up prices5. Recent discussions have highlighted that while institutional investors represent a small percentage of overall purchases, their impact on affordability remains a contentious issue5.
3. Foreign Investment: External capital flows into local housing markets can lead to price increases without necessarily boosting construction. Studies show that foreign investment often inflates housing prices without a corresponding increase in supply, raising concerns about affordability for local residents8.

Conclusion

In summary, external institutions play a critical role in shaping the housing market through legal frameworks, regulatory environments, and cultural norms. Understanding these influences is essential for analyzing market dynamics and addressing issues related to housing affordability and investment strategies. The interplay between institutional structures and economic behavior highlights the importance of effective governance in achieving optimal outcomes in the housing sector."

My question 2: "What are the academic theories to study the external institutions in institutional economics with reference to the subject of housing market?"

The reply: "Academic Theories for Studying External Institutions in Institutional Economics: Focus on the Housing Market

The study of external institutions within institutional economics, particularly regarding the housing market, draws upon several academic theories. These theories provide frameworks to analyze how institutions influence economic behavior and outcomes in housing. Here are the key theories relevant to this context:

1. New Institutional Economics (NIE)

Overview: NIE emphasizes the role of institutions in shaping economic performance, focusing on how formal and informal rules affect market transactions. It builds on the foundational works of scholars like Ronald Coase and Oliver Williamson.

• Key Components:
  • Transaction Costs Theory: This theory posits that the costs associated with making an economic exchange (e.g., search and information costs) significantly impact market dynamics. In the housing market, high transaction costs can deter potential buyers or renters from participating, affecting overall market efficiency14.
  • Property Rights Theory: This theory examines how clearly defined property rights can reduce uncertainty in transactions, encouraging investment in housing. Secure property rights are essential for individuals to engage confidently in buying, selling, or renting properties37.
  • Agency Theory: This theory explores the relationships between principals (owners) and agents (managers), highlighting issues like information asymmetry. In housing, this can manifest in landlord-tenant relationships where landlords may have more information about property conditions than tenants4.

2. Institutional Analysis and Development (IAD) Framework

Overview: Developed by Elinor Ostrom, the IAD framework provides a structured approach to analyze how institutions affect collective action and resource management.

• Application to Housing: The IAD framework can be used to assess how different institutional arrangements (like zoning laws or community regulations) influence housing market outcomes. It emphasizes the importance of local governance structures and community involvement in managing housing resources effectively18.

3. Political Economy of Housing

Overview: This approach integrates political science with economics to understand how political factors shape housing policies and market dynamics.

• Key Aspects:
  • Political Risk and Asset Valuation: Studies have shown that political uncertainties can significantly impact property values in housing markets, as seen in contexts like Hong Kong where lease agreements are influenced by political arrangements6.
  • Regulatory Frameworks: The influence of government regulations on housing supply and affordability is critical. Policies that promote or restrict development can have profound effects on market dynamics and accessibility25.

4. Behavioral Economics

Overview: This theory incorporates psychological insights into economic decision-making, emphasizing that human behavior often deviates from rationality.

• Relevance to Housing Markets: Behavioral economics can help explain why individuals may make suboptimal choices regarding home purchases or rentals due to biases or lack of information. For instance, emotional factors might lead buyers to overvalue properties based on perceived prestige rather than actual utility2.

Conclusion

These academic theories collectively provide a comprehensive framework for studying external institutions' impact on the housing market within institutional economics. By examining transaction costs, property rights, political influences, and behavioral factors, researchers can gain deeper insights into the complexities of housing markets and develop more effective policies to address issues like affordability and accessibility."

My question 3: "What are the external institutions-related research gaps and research issues in institutional economics with reference to the subject of housing market?"

The reply: "External Institutions-Related Research Gaps and Issues in Institutional Economics: Focus on the Housing Market

The study of external institutions within institutional economics, particularly concerning the housing market, has revealed several research gaps and issues over the years. These gaps highlight the complexities of housing dynamics influenced by institutional factors. Here are some key areas identified based on recent literature and discussions:

1. Informal Housing Practices

Research Gap: There is a significant lack of comprehensive research on informal housing practices, especially in developed regions where such practices are often overlooked. Informal housing, such as sub-divided units (SDUs) in Hong Kong, presents unique challenges and opportunities that remain underexplored.

• Issue: Informal housing often arises as a response to unmet needs in formal markets, yet it is frequently associated with inadequate legal protections and precarious living conditions. Understanding the role of these informal practices within the broader housing market is crucial for developing effective policies 26.

2. Impact of Institutional Investors

Research Gap: The increasing presence of institutional investors in the housing market raises questions about their long-term impact on affordability and market stability.

• Issue: While institutional investors can provide liquidity and professional management to rental markets, their influence may exacerbate affordability issues for low-income households. Research is needed to assess how these investors affect local housing dynamics, particularly in terms of pricing and access 1.

3. Regulatory Frameworks and Policy Effectiveness

Research Gap: The effectiveness of various regulatory frameworks aimed at stabilizing housing markets remains inadequately studied.

• Issue: Policymakers often implement measures like taxes and cooling policies to manage housing prices, but empirical evaluations of these interventions' impacts on market behavior and affordability are limited. Understanding how different regulatory approaches interact with market forces is essential for crafting effective housing policies 15.

4. Market Power Dynamics

Research Gap: The concentration of market power 

The reply: "among a few large developers in many urban areas poses significant questions regarding competition and pricing.

• Issue: Research is needed to explore how this concentration affects property prices and market access for average consumers. Investigating the interplay between first-hand and second-hand property markets could yield insights into competitive dynamics that influence overall market efficiency 5.

5. Socioeconomic Impacts of Housing Inequality

Research Gap: The relationship between institutional frameworks and socioeconomic disparities in housing access has not been sufficiently explored.

• Issue: As housing markets evolve, understanding how institutional arrangements contribute to or mitigate inequalities is crucial. This includes examining how policies impact different demographic groups, particularly marginalized populations who may be disproportionately affected by rising rents and limited availability of affordable housing 67.

6. Behavioral Economics in Housing Decisions

Research Gap: Traditional economic models often overlook behavioral factors influencing housing decisions.

• Issue: Integrating behavioral economics into institutional frameworks could enhance understanding of how psychological factors affect buyer and renter behavior, particularly in high-stress environments like competitive housing markets 2.

Conclusion

Addressing these research gaps will contribute to a more nuanced understanding of external institutions' impact on the housing market within institutional economics. By exploring informal practices, the role of institutional investors, regulatory effectiveness, market power dynamics, socioeconomic impacts, and behavioral factors, researchers can develop more effective policies aimed at improving housing accessibility and affordability while fostering sustainable market practices."

My question 4: "What are the research gaps and research issues in institutional economics with reference to the subject of housing market?"

The reply: "Research Gaps and Issues in Institutional Economics: Focus on the Housing Market

The field of institutional economics, particularly in relation to the housing market, presents several research gaps and issues that warrant further exploration. These gaps highlight the complexities of housing dynamics and the role of external institutions in shaping market behavior. Here are the key areas identified:

1. Integration of Informal Institutions

Issue: Much of the existing research focuses predominantly on formal institutions, overlooking the significant impact of informal institutions on housing markets.

• Research Gap: There is a need for studies that incorporate informal practices and arrangements in housing, especially in developing countries where informal markets are prevalent. Understanding how these informal systems interact with formal regulations can provide insights into market behavior and accessibility issues24.

2. Transaction Costs and Housing Affordability

Issue: High transaction costs are recognized as a major barrier to housing affordability, yet comprehensive analyses of their effects remain limited.

• Research Gap: Further investigation is needed to quantify transaction costs across different regions and their direct impact on housing supply and demand. Studies should explore how these costs influence decisions to buy, sell, or rent properties, particularly in urban areas facing affordability crises36.

3. Impact of Institutional Investors

Issue: The rise of institutional investors in the housing market has transformed dynamics, but their long-term effects on affordability and access are not well understood.

• Research Gap: Research should focus on how institutional investment strategies affect local housing markets, particularly regarding price stability, rental rates, and the availability of affordable housing options. The implications of corporate ownership models on community dynamics also require further examination1.

4. Government Intervention vs. Market Forces

Issue: The debate over the appropriate level of government intervention in housing markets continues, with conflicting views on whether markets should be left to operate freely or regulated to address failures.

• Research Gap: Empirical studies are needed to assess the effectiveness of various government interventions in different contexts. This includes examining how regulatory frameworks can be designed to balance market efficiency with social equity in housing access25.

5. Spatial Dynamics and Externalities

Issue: The relationship between spatial factors (such as location and neighborhood characteristics) and housing market outcomes is complex but often inadequately addressed.

• Research Gap: More research is required to understand how neighborhood externalities affect property values and investment decisions. This includes exploring how urban planning and infrastructure development can mitigate or exacerbate these effects24.

6. Behavioral Aspects in Housing Decisions

Issue: Traditional economic models often assume rational decision-making; however, behavioral economics suggests that psychological factors play a significant role in housing choices.

• Research Gap: Integrating behavioral insights into institutional economics could enhance understanding of buyer and renter behaviors, particularly regarding risk perception, emotional attachment to properties, and decision-making under uncertainty48.

Conclusion

Addressing these research gaps will contribute to a more nuanced understanding of institutional economics as it relates to the housing market. By exploring informal institutions, transaction costs, the role of institutional investors, government interventions, spatial dynamics, and behavioral aspects, researchers can develop more effective policies aimed at improving housing accessibility and affordability while fostering sustainable market practices."

My question 5: "What have been the external institutions-related issues in institutional economics reported in the public media over the past 15 years?"

The reply: "External Institutions-Related Issues in Institutional Economics: Housing Market Insights from Public Media (2008-2023)

Over the past 15 years, public media has reported a variety of issues related to external institutions in institutional economics, particularly concerning the housing market. These issues have highlighted the complexities of housing dynamics influenced by institutional factors. Below are key themes and findings:

1. Housing Affordability Crisis
   • Recent analyses indicate that the global housing affordability crisis has worsened significantly, exacerbated by the COVID-19 pandemic and rising inflation. Demand for housing has outstripped supply, leading to increased prices and a growing gap between wealthier and poorer populations. This situation has sparked public concern and political discourse globally, influencing elections and policy discussions1.
2. Impact of Institutional Investors
   • The entry of institutional investors into the single-family rental market has been a focal point of concern. Reports indicate that since 2012, these investors have significantly influenced local housing markets by purchasing large quantities of homes, which has led to increased rents and decreased homeownership opportunities for individuals. For example, in certain regions, institutional investors own up to 25% of the single-family rental market, raising alarms about their impact on affordability and market dynamics23.
3. Regulatory Responses
   • In response to the growing influence of institutional investors, policymakers have proposed various regulatory measures, including potential bans on institutional purchases of single-family homes and limits on rent increases. These discussions reflect broader concerns about how concentrated ownership by large entities can affect local housing markets and community stability26.
4. Market Dynamics Post-Financial Crisis
   • Institutional investors gained prominence after the 2007-2008 financial crisis when they capitalized on foreclosed properties. Reports suggest that these investors played a role in stabilizing the housing market post-crisis but also contributed to rising home prices and rents as they acquired significant shares of the housing stock. The Government Accountability Office (GAO) highlighted that although these investments may have positive impacts on neighborhood diversity, they also pose challenges regarding affordability39.
5. Technological Advancements in Property Management
   • The rise of technology in managing large portfolios of single-family homes has enabled institutional investors to operate more efficiently than smaller landlords. This technological edge has facilitated bulk purchases and streamlined property management processes, further entrenching their position in the market9.
6. Debates on Market Share and Influence
   • There is ongoing debate regarding the actual market share of institutional investors and their influence on housing prices. While some argue that these investors represent a significant threat to affordability by outbidding individual buyers, others contend that their overall market presence remains relatively small compared to traditional buyers. This complexity complicates assessments of their true impact on housing markets69.

Conclusion

The issues surrounding external institutions in institutional economics related to the housing market are multifaceted, encompassing affordability crises, regulatory challenges, the role of institutional investors, and technological advancements in property management. As these dynamics continue to evolve, ongoing research and public discourse will be essential for understanding their implications for housing policy and economic equity."

My question 6: "What have been the external institutions-related issues in institutional economics reported in the Hong Kong public media over the past 15 years?"

The reply: "Over the past 15 years, public media in Hong Kong has reported on various external institutions-related issues within institutional economics, particularly concerning the housing market. These issues reflect the complex interplay between government policies, market dynamics, and socio-economic factors. Here are some key themes and developments:

1. Government Interventions and Housing Policies

• Effectiveness of Interventions: Reports have analyzed the effectiveness of various government measures aimed at stabilizing the housing market. For instance, mortgage-tightening measures introduced to curb overheating in the market effectively reduced both prices and transaction volumes, while tax-driven measures suppressed trading activity but led to price volatility across different submarkets 1.
• Cooling Measures Debate: There has been significant discourse around the government's cooling measures, such as the Special Stamp Duty and Buyer’s Stamp Duty. Property developers and real estate agencies have frequently called for these measures to be relaxed or removed, arguing that they hinder market recovery. In contrast, advocacy groups warn that such relaxations could exacerbate housing unaffordability 24.

2. Impact of Mainland Chinese Buyers

• Cross-Border Migration Effects: The influx of buyers from mainland China has been a consistent topic in media discussions. Studies have shown that even a small percentage of purchases by mainland buyers can create significant upward price momentum in Hong Kong's housing market. For example, reports indicated that mainland buyers accounted for a notable share of new home sales in certain years, influencing overall market trends 2.

3. Money Laundering Concerns

• Capital Flight and Real Estate: Hong Kong's status as a financial hub has made it an attractive destination for wealthy mainland Chinese individuals seeking to transfer assets abroad. This phenomenon has raised concerns about money laundering activities linked to real estate purchases, contributing to inflated property prices and complicating regulatory efforts 2.

4. Housing Affordability Crisis

• Persistent Affordability Issues: Media coverage has highlighted Hong Kong's ongoing housing affordability crisis, with reports indicating that it remains one of the least affordable cities globally. The disparity between income levels and housing prices continues to grow, prompting discussions about sustainable solutions to address this pressing issue 56.

5. Market Dynamics Post-Crisis

• Sales Decline: Recent reports noted a significant drop in home sales, marking the lowest levels since the 2008 financial crisis. This decline was attributed to a combination of high prices, economic uncertainty, and ongoing cooling measures 6.

6. Regulatory Challenges

• Legal Actions Against Real Estate Agencies: In late 2023, legal proceedings were initiated against major real estate agencies for alleged collusion in setting minimum commission rates. This development reflects ongoing scrutiny of practices within the real estate sector and highlights regulatory challenges faced by authorities 2.

Conclusion

The issues surrounding external institutions in institutional economics related to Hong Kong's housing market are multifaceted, encompassing government interventions, cross-border influences, regulatory challenges, and persistent affordability concerns. These themes underscore the complexity of managing a dynamic housing market influenced by both local and external factors over the past 15 years."

Reference: a collection of blog notes on using chatgpt for research purpose.