RESIDENTIAL REAL ESTATE CYCLE AND LEADING INDICATORS

Abstract

Real estate cycle represents 'fluctuations in the activities of the Sector'. Empirical evidence shows that output or prices do fluctuate with a certain degree of rhythm and hence allow certain consistent behaviour to be studied. It has been found by many that the expectations of the investors, the interaction with business cycles, the availability and cost of mortgage funds, the imperfect markets and many other contributory factors; would all influence the cyclical movements of the property market in varying degrees. The study of the real estate cycle will thus provide the serious investor with a framework for understanding the relevance of short term cycles and long term inflation trends. Formulation of strategies with apprehension of the real estate cycle could prevent investors from making hasty decisions which may result in costly mistakes. In the pursuit of a symbolic tool that indicates the status quo and the near future of the economic situation of a country, forecasting tools like the statistical indicators of business cycles have been established widely in manv countries. However, the same barometric test is very rarely applied to the individual industries. This dissertation, therefore, attempts to analyze the application of the statistical indicators to the real estate industry, to seek economic rationale of the cyclical movements of the economic variables residing in the sector and to experiment the forecasting ability of these indicators. There is understandably a dearth of data concerning this area of study. Consequently, only an experimental application of the indicators was analyzed since projects of this nature usually involve massive sums of money and resources. A survey was also conducted to elicit the general opinion of the participants of the real estate sector. While the survey provided some empirical realism in supporting the indicators, great caution need to be exercised with the findings as it is based on only a total of eighty-four respondents. However, the results did illuminate some issues that may reflect the consensus of the industry. Although the constructed leading diffusion index was required to be assessed for its accuracy in forecasting, it is nevertheless a feasible project and it should be encouraged for further development. Given time, many of those promising indicators identified in the survey will have longer time series which could then be incorporated into the index for better reflective analysis. Finally, the study recognizes the great potential in the development of leading indicators. It is hoped that through this dissertation, both public and private sectors will set up similar research in this area to aid in the better formulation of strategies to cope with cycles in the future.