Real Estate Finance and Economics (2026)
Content
Lecture 1: Introduction ............................................................................................. 1
1. Why study real estate? ................................................................................... 1
2. Stylized facts ................................................................................................. 4
3. How to measure the evolution of house prices? ............................................... 7
Lecture 2: House Price Models ............................................................................... 14
1. Housing market ........................................................................................... 14
2. Housing supply ............................................................................................ 15
3. Simple “user cost” model ............................................................................. 17
4. Ability to pay model (ATP).............................................................................. 18
5. Four-quadrant model ................................................................................... 20
Lecture 3: Models & Policy...................................................................................... 26
1. Monocentric city model ................................................................................ 26
2. Policy: Should a government promote homeownership? ................................. 30
3. Policy: Rent regulation .................................................................................. 34
Lecture 4 + 5: Valuation .......................................................................................... 37
1. What is the market value of a house? ............................................................. 37
2. Land values ................................................................................................. 48
3. The relationships between changing market conditions, cap rates, and property
values ................................................................................................................ 49
4. Cost approach ............................................................................................. 51
Lecture 6 + 8: Investments...................................................................................... 52
1. Investing in real estate .................................................................................. 52
2. Market analysis ............................................................................................ 53
3. How does the level of debt affect the IRR? ..................................................... 59
4. Investments in climate change mitigation ...................................................... 62
Lecture 7: Guest lecture – Inclusio .......................................................................... 64
1. Introduction ................................................................................................ 64
2. Composition of Inclusio ............................................................................... 64
, 3. Economic model .......................................................................................... 65
4. Strategy and investment criteria .................................................................... 67
5. Inclusio’s projects – affordable housing ......................................................... 68
Lecture 9: Real options and supply ......................................................................... 69
1. Real options ................................................................................................ 69
2. Real estate finance economics and supply .................................................... 73
3. Does Adding to the Supply of Market-Rate Housing Lead to Increases, Decreases,
or Changes in the Rate of Increase in Rents? ......................................................... 76
4. Does New Housing Make Existing Housing More Affordable Through Filtering or
Chain Moves? ..................................................................................................... 77
5. Broader effects of limiting housing supply ...................................................... 78
Lecture 10: Guest lecture – Tijmen Van Kempen ....................................................... 79
1. The EPC question: did the policy work? .......................................................... 79
2. How do we know what causes what? ............................................................. 81
3. Difference-in-differences (DiD) ..................................................................... 83
4. Regression discontinuity (RD) ....................................................................... 84
5. Back to EPC: what did we find? ..................................................................... 85
6. Exercise – rent or buy in Flanders................................................................... 89
,Practical
➢ Course material
• Articles will be posted on Blackboard.
- Focus on abstract, introduction and conclusion (and discussion of tables and
figures that we discuss in class)
• No handbook required. Background reading:
- “Commercial real estate analysis & investments” by Geltner, Miller, Clayton and
Eichholtz
- “Real estate finance & investments” by Brueggeman & Fisher
• Some handbook chapters will be posted on Blackboard
➢ Grading
• Valuation report in group (market value) of a real estate object (30%)
• Closed book exam (70%)
- Open questions and MCQ.
- The MCQ have a higher passing mark of 63%. However, there is no penalty for incorrect
answers.
➢ Course content
➔ Course divided into 3 main pillars.
1) The big picture
2) Valuation & investment
3) Current topics
, Lecture 1: Introduction
➢ Learning objectives
- Introduction: Why care about real estate?
- Know stylized facts about house price evolutions and total returns to housing
- Understand different methodologies to measure house price evolutions
1. Why study real estate?
1.1. Real estate is by far the most significant store of wealth
➢ The global value of real estate is almost 300 trillion USD
➢ Real estate is the most important asset class
➔ Every person will make a significant decision regarding real estate during their lifetime.
1.2. Homeownership is the dominant tenure type in many countries
➢ In most countries the majority of people are homeowners.
(Exception: Germany)
➔ Is owning a home the smartest decision?
1
,1.3. Houses are the asset of the bottom 90%
The graphs illustrate how different income groups in the U.S. hold their wealth
-> focusing on the composition of assets (like housing, stocks, bonds, cash) and debt (mainly
mortgages) over time.
A) Bottom 50% (Panel A)
➢ Most of their wealth is in housing -> their homes are their main (often only) asset.
➢ This housing wealth is largely financed by debt (mortgages), so net wealth is low.
➢ They hold very few financial assets (stocks, bonds, cash).
→ Key point: Their wealth depends heavily on the housing market and mortgage
conditions.
B) 50–90% (Panel B)
➢ Housing remains a major part of their wealth, though they start to hold more financial
assets (stocks, bonds, savings).
➢ They have less debt relative to assets, so a higher net equity position compared to
the bottom 50%.
→ Key point: Still “housing-heavy,” but with growing diversification.
C) Top 10% (Panel C)
➢ Housing is a smaller share of total wealth.
➢ They own large amounts of financial assets -> stocks, bonds, business equity, etc.
➢ Their mortgage debt is small relative to their total wealth.
→ Key point: Their wealth is highly diversified, with strong net equity positions and
less exposure to housing debt.
2
,1.4. Wealth growth from asset prices
➢ 1971–2007: wealth growth was strongest for the bottom 50%, driven by rising house
prices. The top 10% gained mostly from stocks, but their relative growth was smaller.
➢ 2007–2008 fin. crisis: marked a turning point: collapsing real estate prices caused a
sharp wealth decline for the lower 50%, who were heavily reliant on housing. In contrast,
the top 10% recovered faster thanks to stock market rebounds, widening the wealth gap.
➔ Overall: Before the crisis, housing supported wealth growth for lower groups; after it, the
crash deepened inequality.
1.5. Housing is the business cycle
➢ Graph shows that swings in housing investment
explain much of the ups and downs of the overall
business cycle in the US.
(-> recessions are shown by the vertical grey
lines).
o During expansions, investment in homes rise
strongly, boosting GDP growth.
o When recessions hit, residential investment falls
Residential investment and defense: contributions to GDP growth sharply, and this drop in housing investment is a
major driver of the downturn.
Historically, more than 9 out of 11 post-war US recessions were preceded by a significant
decline in housing investment (= housing drops first), with only two notable false signals (End of
Korean War (1953) and the 2001 dot-com episode)
1.6. Interest rates affect housing starts
➢ Monetary policy has a major impact on
housing.
o Interest rates decrease -> housing starts
increase.
o Interest rates increase -> housing starts
decrease.
3
, 2. Stylized facts
2.1. House prices in the long run
Evolution of real housing
prices (1970-2012) across
six countries.
(real prices = prices
adjusted for inflation).
➢ Real house prices have increased a lot over the last few decades compared to earlier times. (->
post 2010 drop = aftermath of 2008 financial crisis).
o Big risers (Netherlands, Germany): Steep upward lines.
o Steady growers (Belgium, France, UK, US): Gradual climbs with some dips.
➔ They all end higher in the long run, despite short-term drops.
Is the price increase mainly due to higher land prices or higher construction costs?
➔ The increase in land prices was/is much stronger than the increase in construction costs.
2.2. Decomposing house prices in its land and structure value
➢ House value = Land value + Structure value.
-> Land value = House value – Structure value.
2.3. House prices in the very long run (1600-2017)
o Fluctuations can be explained by
major events like wars.
→ But the increase in the past decade
was exceptional when compared to
prior times
Real Amsterdam house prices (1600-2017)
4
,2.4. House price-to-rent ratios (1970-2018)
➢ House price-to-rent ratios measure
home values against annual rents,
helping decide if buying beats renting.
➢ Sharp peaks in late 1980s/early 1990s (Japan bubble burst; Spain/UK booms).
➢ Steady recoveries post-dips, with UK and Spain showing volatile swings.
➢ Germany stays flattest; US climbs gradually after 2008 crash.
2.5. The total return
➢ The total return of real estate is given by: 𝑟𝑡 = (𝐶𝐹𝑡 + 𝑃𝑡 − 𝑃𝑡−1)/𝑃𝑡−1
➢ The total return consists of:
- The income or current yield: 𝑦𝑡 = 𝐶𝐹𝑡/𝑃𝑡−1
- The appreciation or capital return: 𝑔𝑡 = (𝑃𝑡 − 𝑃𝑡−1)/𝑃𝑡−1
➔ 𝑟𝑡 = 𝑦𝑡 + 𝑔𝑡
When investing in real estate, you don't only care about the change in price, but also the cash
flow that your real estate creates (rent, or if you own a home, the money you save on rent).
➢ Return for housing is slightly higher than equity.
➔ The risk regarding real estate investments is much lower compared to equity.
(-> standard deviation of real estate is way lower).
➔ However, the standard deviation does not show the actual risk of real estate investments.
(-> The standard deviation shows the risk for all real estate investments, however nobody
invests in ‘all real estate’).
5
, ➢ Total return on housing
= real capital gains + rental income.
➔ Rental income (yield) is the most important component of the return on housing.
2.6. Other studies find lower returns (1)
➢ Paper by (Eichholtz et al., 2021) critiques the prior study by Jordà et al.
o This study uses actual transaction prices (property prices) instead of estimates.
➔ Consequently, the data shows that total returns on real estate are significantly lower.
2.7. Returns are higher in lower segments in US, NL & BE
How returns differ for different segments of the rental market.
➢ Properties were sorted based on their rental value. (-> dots on graph).
➔ Returns are much higher in the lower segments of the rental market for all 3 countries.
In times of recession, the cash flows in the lower segments of the rental market don’t decrease,
instead they increase (the rent prices increase, thus they act like a hedge).
Why? The lower segments are a necessary part of the housing market. If a recession hits and
you are already living in low rent housing, there’s no real alternative.
However, people in the higher segments tend to move to more affordable housing in times of
recession, thus increasing the demand and rental prices for housing in the lower segments.
6
, Exam question example (MCQ)
Which of the following statements is FALSE?
1) After 1950, capital gains become more important for both housing and equity.
2) Returns are higher in the lower segments of the rental market
3) Most of the total return on housing is attributable to capital gains.
➔ Option 3 is incorrect.
2.8. House prices are falling in almost half of all Flemish municipalities.
➢ This is an incorrect way to measure price changes over
time.
➔ They simply calculated the average sales price in both
years and compared the 2.
All houses are different: If
in year t only large houses are sold, and in year t+1 only small
houses are sold, then this calculation would say that house
prices have decreased heavily, while this may not be
accurate.
3. How to measure the evolution of house prices?
3.1. Why measure the evolution of house prices?
➢ It’s very important to keep track of the price evolution of real estate.
- It’s the most important asset for many households
- May affect residential investment, a very cyclical component of GDP.
➢ We need a ‘good’ house price index
- How have average house prices evolved over time?
- How has the market value of the same house changed over time?
3.2. How to measure the price evolution?
1) Mean/ median price indices 3) Repeat-sales methods
2) Stratified mean or median indices 4) Hedonic regression methods
7
Content
Lecture 1: Introduction ............................................................................................. 1
1. Why study real estate? ................................................................................... 1
2. Stylized facts ................................................................................................. 4
3. How to measure the evolution of house prices? ............................................... 7
Lecture 2: House Price Models ............................................................................... 14
1. Housing market ........................................................................................... 14
2. Housing supply ............................................................................................ 15
3. Simple “user cost” model ............................................................................. 17
4. Ability to pay model (ATP).............................................................................. 18
5. Four-quadrant model ................................................................................... 20
Lecture 3: Models & Policy...................................................................................... 26
1. Monocentric city model ................................................................................ 26
2. Policy: Should a government promote homeownership? ................................. 30
3. Policy: Rent regulation .................................................................................. 34
Lecture 4 + 5: Valuation .......................................................................................... 37
1. What is the market value of a house? ............................................................. 37
2. Land values ................................................................................................. 48
3. The relationships between changing market conditions, cap rates, and property
values ................................................................................................................ 49
4. Cost approach ............................................................................................. 51
Lecture 6 + 8: Investments...................................................................................... 52
1. Investing in real estate .................................................................................. 52
2. Market analysis ............................................................................................ 53
3. How does the level of debt affect the IRR? ..................................................... 59
4. Investments in climate change mitigation ...................................................... 62
Lecture 7: Guest lecture – Inclusio .......................................................................... 64
1. Introduction ................................................................................................ 64
2. Composition of Inclusio ............................................................................... 64
, 3. Economic model .......................................................................................... 65
4. Strategy and investment criteria .................................................................... 67
5. Inclusio’s projects – affordable housing ......................................................... 68
Lecture 9: Real options and supply ......................................................................... 69
1. Real options ................................................................................................ 69
2. Real estate finance economics and supply .................................................... 73
3. Does Adding to the Supply of Market-Rate Housing Lead to Increases, Decreases,
or Changes in the Rate of Increase in Rents? ......................................................... 76
4. Does New Housing Make Existing Housing More Affordable Through Filtering or
Chain Moves? ..................................................................................................... 77
5. Broader effects of limiting housing supply ...................................................... 78
Lecture 10: Guest lecture – Tijmen Van Kempen ....................................................... 79
1. The EPC question: did the policy work? .......................................................... 79
2. How do we know what causes what? ............................................................. 81
3. Difference-in-differences (DiD) ..................................................................... 83
4. Regression discontinuity (RD) ....................................................................... 84
5. Back to EPC: what did we find? ..................................................................... 85
6. Exercise – rent or buy in Flanders................................................................... 89
,Practical
➢ Course material
• Articles will be posted on Blackboard.
- Focus on abstract, introduction and conclusion (and discussion of tables and
figures that we discuss in class)
• No handbook required. Background reading:
- “Commercial real estate analysis & investments” by Geltner, Miller, Clayton and
Eichholtz
- “Real estate finance & investments” by Brueggeman & Fisher
• Some handbook chapters will be posted on Blackboard
➢ Grading
• Valuation report in group (market value) of a real estate object (30%)
• Closed book exam (70%)
- Open questions and MCQ.
- The MCQ have a higher passing mark of 63%. However, there is no penalty for incorrect
answers.
➢ Course content
➔ Course divided into 3 main pillars.
1) The big picture
2) Valuation & investment
3) Current topics
, Lecture 1: Introduction
➢ Learning objectives
- Introduction: Why care about real estate?
- Know stylized facts about house price evolutions and total returns to housing
- Understand different methodologies to measure house price evolutions
1. Why study real estate?
1.1. Real estate is by far the most significant store of wealth
➢ The global value of real estate is almost 300 trillion USD
➢ Real estate is the most important asset class
➔ Every person will make a significant decision regarding real estate during their lifetime.
1.2. Homeownership is the dominant tenure type in many countries
➢ In most countries the majority of people are homeowners.
(Exception: Germany)
➔ Is owning a home the smartest decision?
1
,1.3. Houses are the asset of the bottom 90%
The graphs illustrate how different income groups in the U.S. hold their wealth
-> focusing on the composition of assets (like housing, stocks, bonds, cash) and debt (mainly
mortgages) over time.
A) Bottom 50% (Panel A)
➢ Most of their wealth is in housing -> their homes are their main (often only) asset.
➢ This housing wealth is largely financed by debt (mortgages), so net wealth is low.
➢ They hold very few financial assets (stocks, bonds, cash).
→ Key point: Their wealth depends heavily on the housing market and mortgage
conditions.
B) 50–90% (Panel B)
➢ Housing remains a major part of their wealth, though they start to hold more financial
assets (stocks, bonds, savings).
➢ They have less debt relative to assets, so a higher net equity position compared to
the bottom 50%.
→ Key point: Still “housing-heavy,” but with growing diversification.
C) Top 10% (Panel C)
➢ Housing is a smaller share of total wealth.
➢ They own large amounts of financial assets -> stocks, bonds, business equity, etc.
➢ Their mortgage debt is small relative to their total wealth.
→ Key point: Their wealth is highly diversified, with strong net equity positions and
less exposure to housing debt.
2
,1.4. Wealth growth from asset prices
➢ 1971–2007: wealth growth was strongest for the bottom 50%, driven by rising house
prices. The top 10% gained mostly from stocks, but their relative growth was smaller.
➢ 2007–2008 fin. crisis: marked a turning point: collapsing real estate prices caused a
sharp wealth decline for the lower 50%, who were heavily reliant on housing. In contrast,
the top 10% recovered faster thanks to stock market rebounds, widening the wealth gap.
➔ Overall: Before the crisis, housing supported wealth growth for lower groups; after it, the
crash deepened inequality.
1.5. Housing is the business cycle
➢ Graph shows that swings in housing investment
explain much of the ups and downs of the overall
business cycle in the US.
(-> recessions are shown by the vertical grey
lines).
o During expansions, investment in homes rise
strongly, boosting GDP growth.
o When recessions hit, residential investment falls
Residential investment and defense: contributions to GDP growth sharply, and this drop in housing investment is a
major driver of the downturn.
Historically, more than 9 out of 11 post-war US recessions were preceded by a significant
decline in housing investment (= housing drops first), with only two notable false signals (End of
Korean War (1953) and the 2001 dot-com episode)
1.6. Interest rates affect housing starts
➢ Monetary policy has a major impact on
housing.
o Interest rates decrease -> housing starts
increase.
o Interest rates increase -> housing starts
decrease.
3
, 2. Stylized facts
2.1. House prices in the long run
Evolution of real housing
prices (1970-2012) across
six countries.
(real prices = prices
adjusted for inflation).
➢ Real house prices have increased a lot over the last few decades compared to earlier times. (->
post 2010 drop = aftermath of 2008 financial crisis).
o Big risers (Netherlands, Germany): Steep upward lines.
o Steady growers (Belgium, France, UK, US): Gradual climbs with some dips.
➔ They all end higher in the long run, despite short-term drops.
Is the price increase mainly due to higher land prices or higher construction costs?
➔ The increase in land prices was/is much stronger than the increase in construction costs.
2.2. Decomposing house prices in its land and structure value
➢ House value = Land value + Structure value.
-> Land value = House value – Structure value.
2.3. House prices in the very long run (1600-2017)
o Fluctuations can be explained by
major events like wars.
→ But the increase in the past decade
was exceptional when compared to
prior times
Real Amsterdam house prices (1600-2017)
4
,2.4. House price-to-rent ratios (1970-2018)
➢ House price-to-rent ratios measure
home values against annual rents,
helping decide if buying beats renting.
➢ Sharp peaks in late 1980s/early 1990s (Japan bubble burst; Spain/UK booms).
➢ Steady recoveries post-dips, with UK and Spain showing volatile swings.
➢ Germany stays flattest; US climbs gradually after 2008 crash.
2.5. The total return
➢ The total return of real estate is given by: 𝑟𝑡 = (𝐶𝐹𝑡 + 𝑃𝑡 − 𝑃𝑡−1)/𝑃𝑡−1
➢ The total return consists of:
- The income or current yield: 𝑦𝑡 = 𝐶𝐹𝑡/𝑃𝑡−1
- The appreciation or capital return: 𝑔𝑡 = (𝑃𝑡 − 𝑃𝑡−1)/𝑃𝑡−1
➔ 𝑟𝑡 = 𝑦𝑡 + 𝑔𝑡
When investing in real estate, you don't only care about the change in price, but also the cash
flow that your real estate creates (rent, or if you own a home, the money you save on rent).
➢ Return for housing is slightly higher than equity.
➔ The risk regarding real estate investments is much lower compared to equity.
(-> standard deviation of real estate is way lower).
➔ However, the standard deviation does not show the actual risk of real estate investments.
(-> The standard deviation shows the risk for all real estate investments, however nobody
invests in ‘all real estate’).
5
, ➢ Total return on housing
= real capital gains + rental income.
➔ Rental income (yield) is the most important component of the return on housing.
2.6. Other studies find lower returns (1)
➢ Paper by (Eichholtz et al., 2021) critiques the prior study by Jordà et al.
o This study uses actual transaction prices (property prices) instead of estimates.
➔ Consequently, the data shows that total returns on real estate are significantly lower.
2.7. Returns are higher in lower segments in US, NL & BE
How returns differ for different segments of the rental market.
➢ Properties were sorted based on their rental value. (-> dots on graph).
➔ Returns are much higher in the lower segments of the rental market for all 3 countries.
In times of recession, the cash flows in the lower segments of the rental market don’t decrease,
instead they increase (the rent prices increase, thus they act like a hedge).
Why? The lower segments are a necessary part of the housing market. If a recession hits and
you are already living in low rent housing, there’s no real alternative.
However, people in the higher segments tend to move to more affordable housing in times of
recession, thus increasing the demand and rental prices for housing in the lower segments.
6
, Exam question example (MCQ)
Which of the following statements is FALSE?
1) After 1950, capital gains become more important for both housing and equity.
2) Returns are higher in the lower segments of the rental market
3) Most of the total return on housing is attributable to capital gains.
➔ Option 3 is incorrect.
2.8. House prices are falling in almost half of all Flemish municipalities.
➢ This is an incorrect way to measure price changes over
time.
➔ They simply calculated the average sales price in both
years and compared the 2.
All houses are different: If
in year t only large houses are sold, and in year t+1 only small
houses are sold, then this calculation would say that house
prices have decreased heavily, while this may not be
accurate.
3. How to measure the evolution of house prices?
3.1. Why measure the evolution of house prices?
➢ It’s very important to keep track of the price evolution of real estate.
- It’s the most important asset for many households
- May affect residential investment, a very cyclical component of GDP.
➢ We need a ‘good’ house price index
- How have average house prices evolved over time?
- How has the market value of the same house changed over time?
3.2. How to measure the price evolution?
1) Mean/ median price indices 3) Repeat-sales methods
2) Stratified mean or median indices 4) Hedonic regression methods
7
