Housing Returns Research Articles

Losing Track of the Asset Markets: The Case of Housing and Stock

This paper revisits the relationships among macroeconomic variables and asset returns. Based on recent developments in econometrics, we categorize competing models of asset returns into different Equivalence Predictive Power Classes (EPPC). During the pre-crisis period (1975-2005), some models that emphasize imperfect capital markets outperform an AR(1) for the forecast of housing returns. After 2006, a model that includes both an external finance premium (EFP) and the TED spread learns and adjusts faster than competing models. Models that encompass GDP experience a significant decay in predictive power. We also demonstrate that a simulation-based approach is complementary to the EPPC methodology.

The Time-Series Linkages between US Fiscal Policy and Asset Prices

This paper studies the interplay of fiscal policy and asset price returns of the United States in a time-varying-parameter vector autoregressive model. Using annual data from 1890 to 2013, we study the effects of dynamic shocks to both fiscal policy and asset returns on asset returns and fiscal policy. Distinguishing between low volatility (bull market) and high volatility (bear market) regimes together with a time-varying-parameter vector autoregressive model enables us to isolate the different size and sign of responses to shocks during different time periods. The results indicate that increases in the primary deficit to GDP ratio decrease house returns over the entire sample and at each impulse horizon. Unlike the house return response, stock returns only decrease in the first year after the fiscal shock, but then increase for the following eight years. Furthermore, the findings show that asset return movements affect fiscal policy, whereby fiscal policy responds more to equity returns than to house returns. The response of fiscal policy to asset returns proves relatively stable and constant over time while controlling for and identifying various asset return regimes. Asset returns respond uniformly to fiscal policy shocks since the 1900's.

Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries

We conduct a comprehensive international study of predictability in housing markets using the rent-price ratio as a predictive variable. On data from 18 OECD countries we generally find return predictability in accordance with time-varying risk-premia, but we also document two puzzles. First, there is a highly unstable predictive pattern in rent growth across countries and time periods. Second, the predictive patterns are highly dependent on whether housing returns and rents are measured in nominal or real terms. These results are difficult to reconcile with fully rational expectations. Among other things, the results indicate that housing markets in many countries suffer from money illusion.

Consumption, wealth, stock and housing returns: Evidence from emerging markets

We test the predictive ability of the transitory deviations of consumption from its common trend with aggregate wealth and labour income, cay, for both future equity and housing risk premia in emerging market economies. Using quarterly data for 31 markets, our country-level evidence shows that forecasting power of cay vis-à-vis stock returns is high for Brazil, China, Colombia, Israel, Korea, Latvia and Malaysia. As for housing returns, the empirical evidence suggests that financial and housing assets are perceived as complements in the case of Chile, Russia, South Africa and Thailand, and as substitutes in Argentina, Brazil, Hong Kong, Indonesia, Korea, Malaysia, Mexico and Taiwan. Using a panel econometric framework, we find that the cross-country heterogeneity observed in asset return predictability does not accrue to regional location, but can be attributed to differences in the degree of equity market development and in the level of income.

Comparing consumption-based asset pricing models: The case of an Asian city

Eight consumption-based asset pricing models are developed, estimated and compared their capacities in accounting for the asset markets in Hong Kong. Results based on conventional metrics or recently developed econometric techniques deliver similar results: introducing housing into the consumption-based models does not always improve the models’ performance; how it is introduced matters. Recursive utility model and its housing-augmented variant, which emphasize the importance of early resolution of uncertainty and long term risk, outperform alternative models in forecasting stock returns. Collateral constraint model outperforms in predicting housing return, suggesting the importance of imperfect capital market in the housing market.

Can Housing Risk Be Diversified? A Cautionary Tale from the Housing Boom and Bust

This study evaluates the effectiveness of geographic diversification in reducing housing investment risk. To characterize diversification potential, we estimate spatial correlation and integration among 401 U.S. metropolitan housing markets. The 2000s boom brought a marked uptrend in housing market integration associated with eased residential lending standards and rapid growth in private mortgage securitization. As boom turned to bust, other macroeconomic factors, including employment and income fundamentals, importantly contributed to the trending up in housing return integration. Portfolio simulations reveal substantially lower diversification potential and higher risk in the wake of increased market integration.

Housing market volatility in the OECD area: Evidence from VAR based return decompositions

Vector-autoregressive models are used to decompose housing returns in 18 OECD countries into cash flow (rent) news and discount rate (return) news over the period 1970–2011. For the majority of countries news about future returns is the main driver, and both real interest rates and risk-premia play an important role in accounting for housing market volatility. Bivariate cross-country correlations and principal components analyses indicate that part of the return movements have a common factor among the majority of countries. We explain the results in terms of global changes in credit constraints and transactions costs as well as changes in monetary policy over this period. Among other things, our results shed new light on whether excessively low interest rates by the monetary authorities was a major cause for the housing boom up to 2006.

Housing Price Hikes by Negative Real Interest Rate? A Differencing Model Test on the Housing Markets of Hong Kong and Macau

This paper aims to test the effect of real interest rate on housing return, by using the differencing model for eliminating the effects of other factors. Even though the relationship has been tested before, but it is hard to eliminate other factors when studying the effect of real interest rate on housing return, especially the supply factor and the trading volume factor. This is the first attempt by using the differencing method to eliminate other factors to find the net effect of real interest rate on housing return, by using a two-city comparison, of Hong Kong and Macau from 2007Q1 to 2013Q4. The result shows that real interest rate imposes a negative effect on housing return, but not the housing supply, ceteris paribus.

Monetary policy and bubbles in the national and regional UK housing markets

Numerous studies have explained the significant correlation between monetary policies and asset pricing bubbles. This study uses data on the overall UK housing market and the five UK regions with the highest house prices to evaluate the correlation between monetary policies and pricing bubbles in the UK housing markets. This study uses a theoretical model to verify whether monetary policies affect asset pricing bubbles. Fluctuations in house prices are classified into fluctuations related to fundamentals (the mean reversion behaviour and responses to information in the current period) and fluctuations unrelated to fundamentals (self-related behaviour). After estimating the fluctuation behaviour of house prices through quantile regression, this study asserts that a monetary easing environment can significantly increase housing returns. The self-related phenomenon of asset returns has increased significantly and has thus continuously increased prices and formed a bubble.

Time-Varying Effects of Housing and Stock Returns on U.S. Consumption

This paper applies a time-varying parameter vector autoregressive approach to estimate the relative effects of housing and stock returns on the growth rate of US consumption over time. We use annual data from 1890 to 2012 and find that at the 1- and 2-year horizons and over time, generally the housing return positively affects consumption growth while the stock return negatively affects it. For the 3- to 6-year horizons, the two return shocks generally exert a negative, but small, effect on consumption growth. These opposite responses to changes in housing and stock returns suggest different mechanisms through which wealth affects consumption. Further, the housing return effect generally increases after 1980. The sub-period from 1980 to 2012 includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. These findings suggest that the magnitude of the relative return effects differs with both time and horizons and also depends on whether prices increase or decrease.

Estimating the Excess Returns to Housing at a Disaggregated Level: An Application to Sydney 2003-2011

The returns to housing are particularly important because this asset class makes up such a large fraction of household wealth. Yet they are not straightforward to calculate given both the heterogeneity in homes and the fact they sell only infrequently. We outline a methodology for constructing the excess returns to housing at a disaggregated level, essentially that of the individual home. Our approach explicitly takes account of the inherent risk in homeownership with regard to the capital gain or loss component of housing returns. This approach is applied to a rich data set for Sydney, Australia, from 2003Q1 to 2011Q2. Our findings indicate that the returns to housing are on average quite weak though they exhibit significant diversity across dwelling types and regions. Excess returns are also strongly influenced by assumptions regarding the level of risk aversion. © 2014 American Real Estate and Urban Economics Association.

The Receipt of Subsidized Housing across Generations

In this paper, I ask whether children who grow up in subsidized housing return to the program as adults. I use the Panel Study of Income Dynamics (PSID) and Inverse Probability of Treatment Weighting (IPTW) to compare children who grew up in subsidized housing to those who did not but lived in households eligible to receive the subsidy. I find that children who grew up in subsidized housing have small albeit statistically significant probabilities of returning to subsidized housing as adults.

What Moves the Price-Rent Ratio for Housing? A Modified Present-Value Approach

We consider which factors determined the price-rent ratio for the housing market in 18 U.S. metropolitan areas (MSAs) and at the national level over the period of 1975 to 2012. Based on a present-value framework, our proposed empirical model separates the price-rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price-rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and regional levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price-rent ratios, especially during the 2005-2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated in the pre-2006 sample period, implying an impact of the expected housing return on house prices that is different than what a standard present-value model would imply, although this correlation declined significantly in the post- 2006 sample period. Our results also show that most of the variation in the present-value component of the price-rent ratio arises due to the variation in the expected housing return.

Living the Way the World Does: Global Indians in the Remaking of Kolkata

The transnational activities of migrants continue to gain attention from scholars, national governments, international institutions, and social movements. The migration–development nexus is of special interest and includes the various ways in which both recent and more established diasporas engage in reshaping their former homes. This article considers the proliferation of gated communities and ethnic enclaves meant to house (primarily elite) return migrants in several cities of the Global South using the case of luxury condominium developments in the Indian city of Kolkata. These buildings are marketed equally to overseas Indians as second homes and to locals who wish to inhabit a transnational, cosmopolitan lifestyle in these spaces. The analysis interrogates the figure of the global Indian—a character central to the design and marketing of these developments—in terms of how it has been mythologized, monopolized, and deployed to help reshape the city. Interviews with apartment owners—both local and nonresident—from one of the most prominent of these international-style projects in Kolkata highlight the disjuncture between the assumed lifestyle of transnational migrants and the buildings meant to house them. The findings suggest that we need to think more carefully and critically about what kinds of changes are made possible by either the involvement or the invocation of wealthy overseas communities in development within their former countries.

Consumption-Wealth Ratio and Expected Housing Return

In this paper, we estimate expected return on housing by exploiting information from the variations in the consumptionwealth ratio. We combine a present-value model of consumption with an unobserved component model to express the excess consumption-assets ratio (consumption in excess of labor income) as a linear function of unobserved return on housing assets, financial assets, and consumption growth. We apply a Kalman filter to extract expected housing asset returns from the history of realized returns and excess consumption growth. Our results suggest that filtered housing returns do a significantly better job in predicting realized housing returns than other popular predictors.

Identifying and forecasting house prices: a macroeconomic perspective

This paper studies the forecasting performance of macroeconomic variables on housing returns and on the possible shifts of regimes in house price cycles. We motivate our empirical analysis based on a general equilibrium model, and use a Markov switching model to identify two regimes of housing returns: the high volatility (‘boom-bust’) regime and the low volatility (‘tranquil’) regime. Given US data –, we find that with a single-regime model inflation rate and federal funds rate perform better than other economic aggregates in predicting housing returns. Using the Markov switching model, inflation rate and the federal funds rate are the most consistent predictor for in-sample and out-of-sample forecast of the probability of the ‘boom-bust’ regime. The results imply that motives for inflation hedging and changes in monetary policy matter for the movements of future housing returns and the possible shifts of regimes in house price cycles.

농촌지역 활성화를 위한 빈집 활용방안 연구 - 귀농·귀촌자의 주거안정 관점에서 -

The purpose of this study is derived by Utilization Strategy for Rural empty houses stability of Return to the Farm and Rural. The main findings can be summarized as follows. First, the recent return to the farm and rural has increased, and life patterns of diversification, and the retirement of the baby boomer generation return to the farm and rural ratio differed by region. Second, the required first order accurate and detailed to maximize the utilization of the rural empty houses Survey, and the integrated management system based on it should be built. Third, the public lead in pushing for policy to take advantage of an empty house, leasing and management capabilities by strengthening return to the farm and rural characters, revitalizing rural and residential stabilization is necessary. Finally, in order to enhance the utilization of the rural empty houses should prepare return to the farm and rural, Multi-Habitation and a common space for existing residents for a variety of purposes. The results of these studies has a significance that can promote rural housing return to the farm and rural, resource utilization and stable settlement, and rural areas activated at the same time. Utilization of specific rural empty houses feasible policy being prepared, by linking rural areas that can bring effects on the activation of alternative hope.

Impact of exchange rate regime reform on asset returns in China

Employing monthly data over the period 1999–2010, this paper examines the impact of China's exchange rate regime reform in July 2005 on three major asset markets: house, land, and stocks. We test whether the reform, which switches from a fixed exchange rate regime to a managed floating one, has brought forward structural changes to asset return dynamics. The results suggest that the exchange rate regime switch exerted the most significant impact on house and land returns at the national level, in terms of both returns and their volatilities. In contrast, its impact on China's stock market was moderate, with no structural change being detected in its returns and only weak structural change being found in the dynamics of its volatility. We also find that in comparison with other popular explanatory variables, broad money supply and inflation have the largest explanatory power on housing and land returns in China after the policy reform.

Inflation Protection from Homeownership: Long‐Run Evidence, 1814–2008

This article examines the inflation hedging capacity of the private home. We employ unique long‐term data for inflation, house price dynamics and rents for Amsterdam dating back to 1814, allowing us to study total housing returns in different inflation regimes and for varying investment horizons. Our Amsterdam data show that homeownership's protection against actual and expected inflation increases with the investment horizon. This increase is especially strong for horizons up to 10 years. Inflation protection from housing is stronger when inflation is persistent, and the hedging capacities of housing regarding unexpected inflation are weak.

Stock Returns, Housing Returns and Inflation: Is There an Inflation Illusion?

AbstractThe inflation illusion hypothesis of Modigliani and Cohn () has received renewed attention in explaining a negative relation not only between stock returns and inflation but also between housing returns and inflation. We reexamine the empirical relation in general and the validity of the inflation illusion hypothesis in particular using data from the US, the UK and Korea. We find three key results. (1) The negative relation is particularly strong in recession periods, indicating that the relation is sensitive to business cycles. (2) There are two regimes with positive and negative asset returns and inflation relations for all three countries, and the two‐regime relation is found not only for the stock return–inflation relation but also for the housing return–inflation relation. This finding is at odds with the inflation illusion hypothesis because the hypothesis anticipates only a negative relation for both positive inflation and negative inflation. (3) Housing returns Granger‐cause inflation, and their dynamic net effect on inflation is significantly positive for all three countries. This is at odds with the inflation illusion hypothesis, which anticipates inflation being related to negative returns. Overall, we find limited evidence for the inflation illusion hypothesis. If there is inflation illusion, only a small fraction of investors suffer from it.