Linkages between real estate, monetary policy and financial markets

Abstract

The aim of this study is to investigate transmission mechanisms between real estate and financial and monetary spheres. When we look across countries, there appears to be some correlation historically between declines in real estate prices and financial instability. The existing literature on the inter-relationships between real estate markets and monetary transmission mechanisms focuses mainly on the housing market. This paper attempts to address this research gap by incorporating more real estate markets and not focussing exclusively on the residential market. Also, none of the existing studies investigate the joint relationships in terms of linkage and co-movements between a range of financial and monetary policy components and real estate assets at the same time. We associate these sectors together to study the intensity of the linkage between the real estate and financial sectors on one side, and the real estate and monetary sectors on the other side. We then identify which of these sectors affects real estate more significantly and analyse the impact of such relations on economic policy. A structural vector autoregressive (VAR) is applied to study the sensitivity of the real estate markets. This reveals the sensitivity of residential, commercial and securitized real estate markets to macroeconomic and monetary variables and to the financial market. Furthermore, co-movements of these variables are studied through co-spectral analysis.