Differences in the process of matching buyers to properties in the markets for houses and apartments lead to significant differences in the transaction seasonality of the two markets. In a study that is forthcoming in the Economic Journal, Plamen Nenov, Erling Røed Larsen and Dag Einar Sommervoll explain this economic intuition and confirm the outcome with data from local housing markets in Norway.

Their research shows that property markets that are more ”horizontally heterogeneous” – for example, large houses, which have numerous attributes that potential buyers value differently (floor plan, interior design, building materials, etc.) – are more seasonal than markets for less heterogeneous properties, such as smaller apartments.

The researchers note that housing markets are typically seasonal, with prices and transaction volumes moving in a predictable yearly pattern. But some housing markets display more seasonal transaction patterns than others. The new study argues that these differences in transaction seasonality can arise from the process of matching buyers to properties.

To illustrate why the matching process may lead to differences in the extent of transaction seasonality across housing markets, consider two markets: one consisting of houses; and a second consisting of apartments.

Houses tend to be more heterogeneous than apartments in terms of attributes that potential buyers value differently. For example, differences in floor plans and the particular set-up of the living space, interior decorations or the choice of exterior wall and roofing materials are likely to be more pronounced among houses than among apartments.

This type of heterogeneity is known as ”horizontal” heterogeneity, as opposed to ”vertical” heterogeneity, where properties differ in objective characteristics such as size and location.

For people who are trying to buy, choosing from a large number of properties for sale makes it more likely for them to find an object that matches their preferences and to make a transaction. But given the greater horizontal heterogeneity among houses, these matching benefits are larger for potential buyers in the market for houses than for potential buyers in the market for apartments.

Therefore, in the market for houses, months of the year with many units for sale see many more transactions than months with fewer units. In the market for apartments, the difference in transactions over the year is much smaller.

The authors then test this explanation using data from local housing markets across Norway. The main prediction of their theory is that there should be a positive correlation between horizontal housing heterogeneity and the extent of transaction seasonality.

They partition each local housing market in Norway into several sub-markets using size (small, medium, large) and type (apartment, house) categories. For each sub-market, they measure the extent of seasonality and the degree of horizontal heterogeneity.

The authors show that within local housing markets in Norway, more horizontally heterogeneous sub-markets – for example, those for large houses – are also more seasonal, compared with less heterogeneous ones – for example, markets for smaller apartments.

Therefore, horizontal housing heterogeneity is a robust determinant of a housing market”s transaction seasonality.

”Thick-market Effects, Housing Heterogeneity, and the Determinants of Transaction Seasonality” by Plamen Nenov, Erling Røed Larsen and Dag Einar Sommervoll is forthcoming in the Economic Journal. The authors are at the Norwegian Business School.

Plamen Nenov