Abstract
The purpose of the study was to assess the effect of stock market price on the performance of the residential property market in Kenya. The surge of the residential property prices in Kenya has ignited concerns about the affordability of residential property houses in Kenya. The escalation of residential property prices raises question as to whether it is in tandem with other markets in the Country especially the stock market. Researchers have inconclusive findings on the direction of causation or the strength of the relationship between stock market and performance of residential property market in Kenya. This study adopted a positivist philosophical attitude using causal research design. The study used quarterly secondary data from 2005 to 2018. The study employed vector error correction residual serial correlation langrange multiplier test and vector error residual heteroskedasticity test as the diagnostic tests. Vector error correction model and auto-regressive distributed lag model were employed to test the hypothesis in the short run and long run respectively. The study found that stock market price had a negative effect on performance of residential property market in Kenya in the short term suggesting substitution effect while in the long run stock market price had a positive effect on the performance of residential property market in line with the wealth effect. The study concludes that stock market information spills over and affects residential property market performance in Kenya both in the long run and short run. The study has also contributed to the confounding empirical and theoretical literature and narrowed the research gap especially on the conflicting substitution effect and wealth effect of stock market and residential property market performance in Kenya. Keywords: Stock Market Price, Performance, Residential Property Market DOI : 10.7176/RJFA/10-18-15 Publication date :September 30 th 2019
Highlights
The theoretical framework was confounding as to whether wealth effect or substitution effect explains the relationship between stock market price and performance of residential property market
The results show negative effect between stock market price and residential property market performance in the short run
The descriptive statistics were used to determine whether the series were normally distributed
Summary
The theoretical framework was confounding as to whether wealth effect or substitution effect explains the relationship between stock market price and performance of residential property market. Wokker and Swieringa (2016) did a study on foreign investment and residential property price growth. According to Wokker and Swieringa (2016) stock market returns may affect the demand for properties as some people view them as substitute investments. If investors use past performance as an indicator of an asset class’s future performance a fall in stock returns would decrease expected future returns and thereby reduce the attractiveness of stocks in comparison to residential property market. This would imply a negative correlation between stock market and property returns
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