Abstract
This study examines the long-run and causal relationship between house prices and stock prices in the panel of 22 European Union (EU) countries, covering the monthly data from January 2007 to October 2012. The results show that house prices and stock prices variables are stationary at their first difference, and Pedroni’s heterogeneous cointegration test does not confirmed the long-run relationship between the two variables; hence, it is imperative to employed dynamic OLS estimator for robust statistical inference. The results of dynamic OLS (DOLS) reveal that, among 22 countries, there are five countries which show the negative association between house prices and stock prices, while except France and Italy, the remaining 15 countries show the positive relationship between the variables. There is no significant relationship observed in the case of France and Italy. The panel results confirmed the negative impact of house prices on stock prices in the region. The results of panel causality confirmed the stock led house prices in the short-run, while the causality runs in both directions between the variables in the long-run.
Highlights
Real estate has remained a topic of research interest since the 1980s, but most has focused on the issue of why investors chose to own real estate and the potential benefits of the diversifying real estate (Liao, Zhao, Lim, Wong, & Wong, 2015)
Threshold co-integration tests were applied by Liu and Su (2010), and the results showed a non-linear interlock between stock prices and real estate prices in China
The results show that, out of 22 countries, there are five countries which exhibit a negative association between house prices and stock prices, while there are 15 countries which indicate a positive relationship between the variables
Summary
Real estate has remained a topic of research interest since the 1980s, but most has focused on the issue of why investors chose to own real estate and the potential benefits of the diversifying real estate (Liao, Zhao, Lim, Wong, & Wong, 2015). Recent booms and busts have made the relationship between stock and house markets questionable Both the assets (i.e., house and stocks) are substitute investment, but house prices have an additional feature of consumable goods. According to McMillan (2011), the relationship between both the assets is assumed to be non-linear, as their pace of price adjustment is not similar. It has become very confusing for the policy-makers to understand the direction of this causality because of the price bubble phenomenon (McMillan, 2011). The relationship between stock price and house prices is supposed to be non-linear This supposition is justified on the basis of two grounds. The final section represents conclusions and practical implications of the study
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