Real Estate Market Risk Research Articles

Analysis of the Combined Impact of Socio-Economic Factors on House Price Volatility in the Housing Market

As an important variable in China’s economic system, real estate price is a key point closely linked to the country’s economy and people’s livelihood. It is of great practical significance to study the impact of socio-economic factors in the housing market on China’s house prices and its transmission mechanism, so as to put forward corresponding policy recommendations for stabilizing house prices and preventing real estate market and financial risks. Taking China’s time series data from 2014 to 2023 as a sample, this paper empirically investigates the law of the relationship between socio-economic factors in the housing market and house price fluctuations by constructing a structural vector autoregressive model, and employs impulse response function and variance decomposition to analyze the relationship between the two dynamically. The study shows that the 15-period variance decomposition effect of itself and residents’ disposable income are the main influencing factors of house price fluctuation, and the degree of explanation of its fluctuation is 55.5% and 23.2% respectively. In a market economy, real estate prices fluctuate up and down around their value due to the law of value. Therefore, real estate prices cannot rise indefinitely, and the final result should be stabilized within a reasonable level.

The impact of real estate market risks on the issuance costs of urban investment bonds: Evidence from China

It has been widely believed that bond spreads are positively correlated with related market risks. However, some studies in China's urban investment bond (UIB) market indicate that an increase in real estate market risks usually narrows UIB spreads. This article focused on such puzzle and introduced a quadratic form regression to detect a U-shaped relationship between housing price volatility and UIB spreads, which confirms that UIB pricing is actually in consistence with the traditional bond theory. We further indicated that spreads of guaranteed UIBs were barely affected by housing price volatility, and fiscal transparency seemed to mitigate such volatility's impact on the issuance costs of UIBs. Those findings not only illuminate ways of mitigating risks in the UIB market in China using market instruments but also have important implications for how local governments around the world can mitigate their debt-related problems.

Energy Price Fluctuation and Real Estate Market Risk Prevention—Empirical Evidence at the Prefecture-Level City Level in China

Abstract The impact of energy price fluctuation on the macro economy is a hot issue that is continuously concerned by the academic community, but few literature have paid attention to the impact of energy price fluctuation on housing price and the financial risks that may arise. Based on the data of cities at and above the prefecture level in China, this paper empirically examines the impact of energy price fluctuation on the price fluctuation of the domestic real estate, and analyzes its influencing mechanism and transmission pathways. The results show that changes of energy price will significantly affect the fluctuation of domestic real estate price, and it is more obvious in large cities and megacities. Energy price affect the demand for housing through changes of interest rate levels on the one hand, and the supply of the real estate market through the cost of housing construction on the other hand, which leads to housing price fluctuation. After a series of robustness tests, the results are still valid. At the same time, the effect is asymmetric, that is, higher energy price increases the fluctuation of house price, but the impact of falling energy price is not significant. Therefore, when preventing real estate market risks, energy price should be considered as a forward-looking indicator to focus on, and the regulation and control policies of the real estate market should be scientifically formulated. This paper not only provides a new perspective on the mechanism of housing price formation, but also enriches the research on the interconnection between energy and financial markets.

Coordination of monetary and macroprudential policies, land finance behavior and risk prevention in the real estate market

ABSTRACT This paper measures the real estate market risk in China by embedding the relative volatility of stock returns in the real estate industry into the Marginal Expected Shortfall Model. Subsequently, we examine the effectiveness of the coordination of monetary and macroprudential policies in preventing real estate market risk based on panel data from cities. Additionally, we investigate the impact of local government’s land finance behavior on the effectiveness of the coordination of these two policies. The results show that the tightening monetary policy can strengthen the restraining effect of macroprudential policy on real estate market risk. From the perspective of risk prevention in the real estate market, whether it is a quantitative or price-based monetary policy tool, land finance behavior can weaken the regulatory effect of the coordination of monetary and macroprudential policies. Moreover, this weakening effect is more pronounced in the regions with high vertical fiscal imbalance and intense economic competition. One of the important policy implications is that regulatory authorities should strengthen the coordination among local fiscal behavior, monetary policy, and macroprudential policy. This will enhance the effectiveness of the coordination of monetary policy and macroprudential policy to prevent risks in the real estate market.

Land Finance, Real Estate Market, and Local Government Debt Risk: Evidence from China

The financing function of land in China has been extensively documented, but little research has explored the role of land finance in the real estate market affecting local government debt. In light of the recent simultaneous increase in China’s real estate market risk and local government debt risk over the past two years, a pressing need to reevaluate the significance of land finance has arisen. Thus, this study explores the role of land finance in the relationship between the real estate market and local debt risk. The data were collected from 224 Chinese cities from 2010 to 2019. The study found that real estate market prosperity significantly promotes the expansion of local government debt. Land finance acts as a mediator and a moderator in this relationship. The study also found that during periods of real estate market booms, local governments tend to sell more land, which reinforces their debt-raising behavior and exacerbates the impact of the real estate market on local government debt; during periods of real estate market downturns, local governments tend to decrease debt, but the government debt repayment risk increases significantly. Furthermore, the amplifying effect of land finance is more pronounced in economically developed regions and cities with higher public budget revenues.

An Extended Fama-French Multi-Factor Model in Direct Real Estate Investing

Understanding risk-adjusted returns in real estate investment are crucial, but little is known about the risk-adjusted returns for direct real estate. This paper examines risk-adjusted total returns by developing an extended capital asset pricing model (CAPM) to investigate whether direct real estate returns compensate for their risk levels. Based on a panel dataset of the residential property transaction in 62 Territorial Authorities of New Zealand from 2002Q1 to 2018Q4, a direct real estate portfolio performance in the single-factor CAPM model is compared with the national housing markets stock markets and REITs markets in New Zealand before the pandemic. The results demonstrate that the direct real estate returns outperform the market returns with a significant positive alpha and beta smaller than one but positive. The alpha is further evaluated by the five-factor CAPM model, which includes the factors of liquidity risk, value risk, time risk, credit-rating risk, and currency risk. The assessment shows that most of the excess return (alpha) can be attributed to direct real estate market risks.

Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?

This paper studies the pricing of the risk associated with the location of the assets. The local real estate market risk is measured by ‘local beta’, which combines the systematic risk of local property markets and the property allocation strategy of real estate firms. The empirical results confirm a higher equity return for a firm with higher exposure to the most volatile property markets, particularly for REITs which are more geographically concentrated. For REITs with highly diversified assets, local real estate risks are not reflected in REIT returns. For those REITs with most concentrated assets, a one standard deviation increase in the local beta will lead to a 4.7% increase in the annual return. Investors can use REITs’ local real estate risk as an information tool to construct a long-short investment portfolio of real estate firms and can achieve a significant non-market performance of 4.9% per annum.

Impact of Institutional Investors on Real Estate Risk

Private real estate markets have experienced signi ficant in inflows of institutional capital over the last couple of decades. In this paper we seek to understand what are the implications of this recent development. Employing a generalized Hamiltonian Monte Carlo Bayesian procedure we find novel empirical evidence that market entry by large institutional investors predicts higher uncertainty and greater noise in real estate prices in the short and medium run, and lower longitudinal risk in the long run. Our findings point to a signi ficant eff ect of institutional capital, which serves as a catalyst for structural changes in real estate market risk.

Analysis of the National Real Estate Market Risk Management under the National Macro-Control Policy—Take Jinan as an Example

<p>In recent years, the real estate market regulation and control policies have been issued intensively, and the regulatory means have been more focused on “implementing policies according to the city”. On the whole, the important position of real estate as the pillar of our national economy has not changed, but many new characteristics have been derived from the industry. In this article, the real estate market in Jinan from 2010 to 2019 is selected, and the risk assessment and management of real estate market in Jinan City are analyzed by using the method of quantitative and qualitative risk assessment. Combined with the results of risk assessment, corresponding management countermeasures are put forward, which has certain practical significance.</p>

Valuation of real-estate losses via Monte Carlo simulation

The valuation of the exposure to real estate market risk has traditionally been difficult due to the lack of appropriate data, returns that do not follow a normal distribution and a lack of adequate methodology. However, regulations such as Basel II, Basel III and Solvency II make it possible to assess real estate market risk using an internal model and through Value at Risk. The study develops a procedure to provide an internal model that values real estate market risk and calculates the capital that guarantees it. Monte Carlo simulations are used to calculate Value at Risk. As result, capital requirements can be established from these results to help with portfolio decision-making of insurance companies that hold real estate. Data used in the study is taken from the General Council of Notaries registered dwellings databases from the Spanish National Statistics Institute covering the time period of 2007–2017. This paper contributes to the literature by proposing a model that incorporates the characteristics of investments, allowing a real and market measure of the risk of loss from real estate.

Spillovers in risk of financial institutions

ABSTRACTWe analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. We examine the response of the spillover levels, within the set of systemic risk state variables, to a number of events in the financial markets and to initiatives undertaken by the European Central Bank and the Bank of England. The relationship between the time-varying spillovers and policy-related events is analysed using a multiple structural break estimation procedure and looking at the temporary increases in the spillover indices. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables. However, the role of the other variables reverses over the course of the crisis. We document that the total and net spillover indices react strongly to the events relating to financial assistance packages in Europe.

RISK OF INNOVATIVE ACTIVITY ON THE REAL ESTATE MARKET

The paper presents the risk of innovative activities in the real estate market. The aim of the paper is analysis of the investment risks within services in this market. It postulated that the risk connected with implementation of innovations in the real estate market is especially critical to this market. Secondary sources of information regarding the innovative activity on the real estate market and related risks were used to achieve the work objective, and obtained as part of the project “Support for monitoring cohesion policy ...”, furthermore results connected in the European Innovation Scoreboard 2016 and the results presented by McKinsey &Company derived from the survey of 100 biggest companies in Poland. Analysis of the results obtained in the study supported the thesis concerning the important role of the risk of innovative activities in the real estate market, which is little transparent in Poland and characterized by substantial variability of conditions.

RETRACTED ARTICLE: Design of early warning multimedia computer system for real estate market under PROBIT model

The economic benefits brought by real estate are undoubtedly huge for the country and society, but once the real estate market has a serious credit crisis, the whole macroeconomic turmoil will even lead to economic collapse. Many scholars have conducted relevant research on the risk warning of the real estate market, but most of the research is too limited and the early warning system lacks reliable basis and accuracy. Therefore, based on the importance of the real estate economy, it is very important and meaningful to study a system that can accurately and reliably predict the real estate market. This paper abandons the disadvantages of traditional models such as unreliability and innovation based on the Probit model principle. Based on the data of the Nanjing regional real estate market from 2008 to 2018, the macroeconomic variables of this decade and their related real estate economic variables are horizontally and vertically. The real estate market early warning system was constructed and its risk verification analysis was carried out. Finally, based on this system, the real estate market risk of Wuxi City in the first two quarters of 2016 was verified. The verification results show that the early warning rate based on the early warning system proposed in this paper is 85%.

Factors influencing the propensity of real estate investors in the UK to employ property derivatives

PurposeReal estate is the last major asset class without liquid derivatives markets. The reasons for that are not fully known or understood. Therefore, the purpose of this paper is to better understand the main factors that influence the propensity of commercial real estate investors in the UK to employ property derivatives.Design/methodology/approachThe research methodology that was chosen for this research is grounded theory which, in its original form, goes back to Glaser and Strauss (1967). A total of 43 interviews were conducted with 46 real estate professionals in the UK from property investment management firms (investing directly or indirectly in real estate), multi-asset management firms, real estate investment trusts, banks, and brokerage and advisory firms, among others.FindingsThe research results show 29 factors that influence the propensity of direct and indirect real estate investors in the UK to employ property derivatives. Out of the 29 factors, the current research identified 12 factors with high-explanatory power, 6 with a contributing role and 11 with low explanatory power. Moreover, factors previously discussed in the literature are tested and assessed as to their explanatory power. The focus of this paper is on those factors with high-explanatory power. From the research data, three main reasons have been identified as the sources of investor reluctance to trade in property derivatives. The first and main reason is related to a mismatch between motivations of property investment managers and what can be achieved with the instruments. The second reason, which ties in with the first one, is a general misunderstanding as to the right pricing technique of property derivatives. Finally, the third reason is a general lack of hedging demand from the investor base owing to the long investment horizons through market cycles.Research limitations/implicationsThe research contributes to the literature on property derivatives in various ways. First, it extends the literature on market hurdles in property derivatives markets by testing and extending the hurdles that were proposed previously. Second, the research shows that the existing pricing models need to be extended in order to account for the risk perception of practitioners and their concerns with regard to liquidity levels.Practical implicationsFor both theory and practice, the research has shown some limitations in using property derivatives for purposes such as creating index exposure or hedging. Another contribution, in this case to practice, is that this study provides a clearer picture as to the reasons that keep property investment managers away from using property derivatives.Originality/valueThe research results indicate that liquidity per se is not a universal remedy for the problems in the market. In addition to the need for improving the understanding of the pricing mechanism, practitioners should give more thought to the notion of real estate market risk and the commensurate returns that can reasonably be expected when they take or reduce it. This implies that property index futures currently do not price like those on any other investable asset class.

Regime-dependent linkages between securitized real estate market and major financial markets: some international evidence

ABSTRACTWe employ Markov regime-switching approach to explore the regime-dependent linkages between securitized real estate market and stock, money, bond and foreign exchange markets for 10 economies. During high-volatility periods in securitized property markets, stock market return, and to some extent, changes to foreign exchange market rates impose stronger and positive impact on securitized real estate market returns. Moreover, stock and bond market risks are linked negatively to securitized real estate market risk. Although the asymmetrical regime-dependent influences of the financial market performance indicators on the SRE market do vary across the 10 economies studied in terms of direction and significance, the results highlight the risk of increased exposure of securitized property markets to financial markets during high-volatility market conditions which the investors and policymakers should be alerted to.

Volatility causality and contagion in international securitized real estate markets

PurposeThis paper aims to investigate volatility causality and return contagion on nine international securitized real estate markets by appealing to Markov-switching (MS) regime approach, from July 1992 to June 2014.Design/methodology/approachAn MS causality interaction model (Psaradakis et al., 2005), an MS vector auto-regression mode (Krolzig, 1997) and a multivariate return contagion model (Dungey et al., 2005) were used to implement the empirical investigations.FindingsThere exist regime shifts in the volatility causality pattern, with the volatility causality effects more pronounced during high volatility periods. During high volatility period, real estate markets’ causality interactions and inter-linkages contribute to strong spillover effect that leads to extreme volatility. However, there is relatively limited return contagion evidence in the securitized real estate markets examined. As such, the US financial crisis might probably be due to cross-market interdependence rather than contagion.Research limitations/implicationsBecause international investors incorporate into their portfolio allocation not only the long-run price relationship but also the short-run market volatility connectedness and return correlation structure, the results of this MS causality and contagion study have provided valuable information on the evaluation of regime-dependent securitized real estate market risk, as well as useful guidance on asset allocation and portfolio management decisions for institutional investors.Practical implicationsFinancial crisis is one of the key determinants of cross-market volatility interactions. Portfolio managers should be alerted of the observation that the US and the other developed securitized real estate markets are increasingly sharing “common market cycles” in recent years, thereby diminishing the diversification benefits. For policymakers, this research indicates that the volatilities of the US securitized real estate market could be helpful to predict those of other developed markets. It is also important for them to pay attention to those potential risk factors behind the amplified causality, contagion and volatility spillover at times of crisis. Finally, a wider implication for policymakers is to manage the transmission channels through which global stock market return and volatility shocks can affect the local economies and domestic financial markets, including securitized real estate markets.Originality/valueReal estate investments have emerged to show low correlation with stocks and bonds and contributed to portfolio optimization. With real estate that can serve as a type of consumption commodity and an investment tool, the risk-return profile of real estate is different from that of the underlying stock markets. Therefore, the performance and investment dynamics and real estate-stock link are not theoretically expected to be similar, that requires separate empirical investigations. This paper aims to stand out from the many papers on the same or similar topics in the application of the three MS methodologies to regime-dependent real estate market integration.

Spillovers in Risk of Financial Institutions

We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity.

The China Risk and Korea's Response

Recently, the Chinese economy is undergoing a slowdown in the real economy, falling stock prices in the stock market, and devaluation of the yuan in the foreign exchange market. This research analyzes the current condition of the Chinese economy, evaluating the risks in China's real and financial economy. It also estimates the effects such risks can have on the Korean economy, presenting suggestions for Korea in responding to the China risk. The Chinese economy has maintained an annual average of 9.7% growth since its reform and opening up, but this slowed down to 7.3%~7.7% during 2012~2014, and plunged to 7.0% in the first half of 2015, entering the so-called era of a new normal. Factors such as excessive production facilities, local government debt, adjustments in the real estate market and financial risk are hindering the nation's economic development. China's stock price, which crashed due to China's economic slowdown and a growing distrust in the government's ability to manage the stock market, nonetheless is not on the verge of collapse, as the total value of listed stocks remains above the trend line and the total trade volume also remains high. Moreover, as the correlation between stocks and the real economy is still low, the impact of the recent stock market crash on the real economy will be limited. As China's real economy is projected to continue undergoing a recession, it is important to utilize the opportunities that come from qualitative changes in the economy, while preparing for the risks that economic slowdown entails.

Special Assessment District's Ability to Fund Transit

This paper reviews four transit projects funded by using special assessment districts (SADs) across the United States. The paper examines the SAD revenue yield and stability and focuses on the actions taken by public agencies to enhance them; this examination results in three important findings. First, SAD revenues are highly stable and can be expected to generate large sums of money. However, as a proportion of project cost, such revenues might fund a small portion of capital-intensive transit projects such as heavy rail. Second, SAD revenues typically do not accrue up front because property owners have the option to pay the fee over time. Therefore, public agencies must rely on other funding sources (usually assessment fee-backed bonds) to address this revenue-expenditure mismatch. Finally, to ensure that assessment revenues do not decline in real dollars when paid over time, public agencies charge property owners interest, usually on the basis of the interest paid to service the assessment-backed bonds. Public agencies can take the following steps to enhance SADs’ revenue yield and stability. First, try to capture as large a portion of the property value increase as is politically feasible. Second, use SADs to demonstrate local community support for a transit project, thereby leveraging state and federal funds. Third, minimize the number of properties exempt from paying assessments. Fourth, minimize real estate market risks to SAD revenues by formulating a revenue calculation methodology based on factors other than or in addition to property value, such as a parcel's street frontage and size and a property's building area. In addition, the assessment fee could be a proportion of the property's previously assessed value or a proportion of a fixed property value increment. Fifth, ensure full payment of fees.

The social construction of real estate market risk. The case of a financial investments cluster in Mexico City

This article contributes to the study of the geographical concentration of financial investments in real estate markets. It demonstrates the social construction process at work in the evolution of real estate market risks. The objective is to highlight the conditions that allow or impede the implementation of ‘opportunistic’ and ‘conservative’ risk strategies. By analyzing the market entry of financial investors in the Cuautitlan industrial real estate market - an ‘emerging’ real estate market in Mexico City - this paper demonstrates that, due to the joint action of land developers, non-financial as well as financial real estate investors, this market moved from being ‘too risky’ to becoming an opportunistic market, and then a conservative one. There were two important phases in the transformation process. First, the contribution of land developers was fundamental to the transformation of the market from being too risky to being opportunistic from the perspective of financial investors. Two different types of land developers are evident: some are not willing to help financial investors’ entry in the market while others developed a business plan designed to facilitate financial investments. In the second phase of the market’s risks transformation, opportunistic financial investors enabled the conditions for the arrival of conservative financial investors, thanks to their presence in emerging markets and the diffusion of information.