THE ECONOMY & THE REAL ESTATE (PRICE) MARKET - A COINTEGRATION ANALYSIS

Abstract

The real estate market cannot be divorced from the economic realities of the economic system that it functions within. This dissertation therefore undertook the task of exploring the existence of contemporaneous relationships between the general economy, taken to be reflected by the Gross Domestic Product (GDP), and the overall real estate (price) market. Past studies made in this respect were mostly concerned with short-term contemporaneous relationships between the two, without any inferences made with regard to their long-term equilibrium. Therefore, it is the main objective of this dissertation to investigate the existence of a long-term contemporaneous equilibrium relationship between the economy (GDP) and the overall real estate price market (PPIA), and also with two of its sub-sectors, namely the residential (PPIR) and commercial (PPIC) sectors respectively. A series of rigorous empirical tests were applied for this study. A Cointegration Analysis is carried out using the Engle-Granger method of cointegration. The test revealed a very interesting result of no long-term contemporaneous equilibrium relationship between the respective real estate price series with the economy (GDP). This is least expected as most past studies had found some form of contemporaneous, although mostly short-term, relationship between the two sectors in one way or another. The study further carried out a few brief empirical tests, namely - the Pearson's (2-tailed) Correlation Test, the Contemporaneous & Lagged Cross-Correlation Test, and the Granger Causality Test - to test for the existence of other short-term contemporaneous relationships. The study revealed that although there is no cointegration significance, there exist other short-term contemporaneous relationships between them.