Safe-haven demand for housing in London

Abstract

The purpose of this paper is to investigate whether economic uncertainty in major economies like the euro area, the US, China, and Russia triggers a safe-haven demand for residential real estates in London. For the empirical analysis, linear error correction modeling framework is augmented to a threshold regression with further variables such as, an uncertainty measure and a reference portfolio in order to identify potential safe-have demand for housing in the UK. Moreover, region-specific equations allow the reference portfolio to be regime-dependent to capture asymmetric characteristics of safe-haven demand in times of higher uncertainty. As the reference portfolio of risky assets, this paper uses stock market performance in the UK relative to the region of interest. Moreover, a relative economic uncertainty index for the UK is added into regressions to count for economic uncertainty in both regions. This paper finds significant evidence for safe-haven demand for housing in London originating from the euro area and the US in times of higher uncertainty, whereas increasing stock wealth and improving economic circumstances drive the real estate investments from China and Russia.