Explaining Housing Market Dynamics within a Dynamic Factor Approach: Economic Interpretation and Estimation

Abstract

The economic interpretation and model estimation of housing market dynamics in this study provide meaningful insights by focusing on housing assets and housing market illiquidity. The resulting generalized dynamic factor model enables us to capture unobservable forces such as expectation, uncertainty, and transaction cost to estimate housing market dynamics and time series variations in private housing prices. The empirical results support the existence of two common factors underlying Singapore's private housing market dynamics between 1988 and 2007. The private housing market-wide series, which is highly related to financial conditions, exhibits a high degree of commonality, and the explanatory power of the time series variation is higher when private housing prices are more volatile.