2. The simulation model structure
The simulation model is integrated in a Microsoft Excel workbook. This approach allows the storage of key input datasets with econometric module results. It also allows interactive input to key changeable policy variables (such as net additions to the housing stock), the use of scenarios (for example, to explore the impact of macro economic scenarios), and the automatic generation of outputs. The workbook contains a number of different types of worksheet:
- Information sheets. These perform no role in the calculations within the simulation model but simply provide more detail on the nature and workings of the model. Variable definitions and historical values of key input variables are also discussed.
- Data sheets. Many of the worksheets within the Excel workbook host datasets consisting of the key exogenous and endogenous variables used by the simulation model. Some of the data sheets store exogenous variables that do not change as a result of the simulation model calculations. Others contain endogenous variables. These are the variables whose values change in the forward time period (2007 onwards) as a result of the simulation model calculations.
- Econometric module results. These worksheets contain the parameters of the five econometric modules that, together, comprise the simulation model. In general, the user does not need to see these worksheets. The values in these worksheets are constants and should not be changed by the user. The simulation model works by combining variable values from data sheets with module parameters in the econometric worksheets, and performing a range of calculations.
- Calculation sheets. The simulation model requires complex transformations to variables prior to their use in the calculations. To retain the simplicity of the structure of data sheets and econometric results worksheets, separate worksheets are used to create variables that are derived from combinations of variables in the data sheets.
- The "policy input" worksheet. This is one of the most important from the user's perspective. This worksheet allows the interactive selection of macro economic and policy variable parameters. These user selections alter the simulation results indirectly, by altering variable values in the data sheets and calculation sheets. These changes feed through the simulation model to provide revised outcomes (house prices, incomes, affordability measures, migration).
- The "Offoutputs" worksheet. This is another of the most important worksheets from the perspective of a model user. It contains a set of pre-defined tables and charts that summarise the predictions of the simulation model. These tables and charts update automatically when the user alters one of the user-controlled parameters in the " policy input" worksheet.
As discussed briefly above, the "policy input" worksheet allows the user to alter a number of assumptions or policy relevant variables. The key alterable sub-regional parameter is the net rate of net additions to the housing stock. A control is provided to allow the user to enter these assumptions in two different forms - the annual rate of housing stock increase, or the absolute annual increase to the housing stock. Macro, or Scotland level, variables include RPI and CPI inflation, annual stock returns (log difference of FTSE-100 index), growth in Scotland-level gross value added ( GVA), property tax (affecting the user cost of capital), the proportion of adults with a university degree and the nominal mortgage rate. The most important of these, from the user's perspective, is the nominal mortgage rate. This variable is an important element of the user cost of capital (the relative cost of owning rather than renting housing). The user cost of capital, in turn, is an important determinant of house price growth. As the nominal mortgage rate rises (all other factors held constant), future house price growth reduces. The other macro (Scotland) level variables listed have an important, but small, impact on house price growth (particularly CPI inflation). Growth in Scotland-level GVA impacts household incomes, with a knock-on impact on house price growth.
Figure 2 is a screen capture showing the macro (Scotland) level variable table, the annual stock percentage / absolute increase selector and two other controls at the top of the worksheet - GROS assumptions and base year.
Figure 2 Screen capture of the "policy input" worksheet
GROS population projections are a very important component of the simulation model. Population projections in the forward simulation period are effectively converted to predicted numbers of households in the 8 sub-national areas. These predictions are handled by the household formation ( HF) module. The " GROS assumptions" control allows the user to switch between a standard set of population projections, and an alternative set based on a different set of assumptions.
The alternative set builds in higher estimates based mainly on higher assumed rates of international inward migration. When selecting between these two sets of GROS population projections, the household formation module updates the number of households in the 8 sub-national areas over the simulation period. This then alters a range of outcomes of the simulation model including household migration between sub-national areas, house prices and household incomes.
The "base year" control allows the user to re-base the economic and financial outputs to a given base year. Changing the base year makes no difference to the simulation model calculations, but simply re-bases the outputs summarised in the "Offoutputs" worksheet.