Comovements and Spillovers in International Commercial and Residential Real Estate Markets

Abstract

To what extent do the commercial and the residential estate markets move together across different countries? Do the shocks originating in one of these markets spillover to the other markets? We answer these questions by applying a modified version of the dynamic factor model to the commercial and residential real estate prices in the Euro area, Hong Kong, Singapore and the U.S. This modified dynamic factor model decomposes the price growth in these two real estate markets into common, spillover and idiosyncratic components. The results show significant heterogeneity in the relative importance of these three components in the evolution of commercial and residential price growth across different countries and across time. Our findings suggest that the spillover from residential to commercial real estate market dominates the spillover from commercial to real estate market for all the countries in our sample. We also find that common component accounts for a large fraction of the price movements in the residential markets in the EU area and the U.S, whereas spillover and common component together explain more than two-third of the variations in Hong Kong and Singapore. We also find that the role of spillover from one market to another increased significantly during the financial crisis of 2008-09.