Interdependence of Property Prices and Building Vacancy Rates in Residential and Commercial Real Estate Markets: Hong Kong and Singapore

Abstract

In this research, we attempt to find the statistical interdependent relationship between vacancy rates and property prices in residential real estate market and commercial real estate market in Hong Kong and Singapore, the two cities sharing lots of characteristics in common. Vector autoregression (VAR) models and Granger causality tests are conducted to find out the causal relationship between residential housing or office building vacancy rate and the prices in respective markets. We also conduct vector error correction model if the variable pair is cointegrated at the same level.In the analysis of interdependence and VAR model estimation, prices and vacancy rates in Hong Kong residential real estate market and the commercial real estate markets in both cities do not significantly affect to each other. In Singapore residential market, lagged differenced vacancy rate negatively affects future differenced house price, the relation resulting from “fundamental driven effect.” For housing vacancy can be treated as excess supply in real estate market, the price will drop to decrease excess supply and to achieve long-term equilibrium when fundamental demand of residential house is less than supply, ceteris paribus. We also execute comprehensive market comparison of interdependence of property prices and vacancy rates and check the mutual effects of two variables in each type of real estate markets under the panel VAR dynamics. By vector error correction model (VECM), it is discovered that the long term relationship between vacancy rate and price exists in Singapore office building market. Moreover, the Singaporean office building differenced vacancy rate is affected by the deviations from the long term equilibrium relationship between price and vacancy rate. It is also found that, of the two types of property prices in Hong Kong, the long term relationship between residential house price and office building price exists.