REAL ESTATE INVESTMENT AND THE BUSINESS CYCLE : A STUDY OF THE SINGAPORE INDUSTRIAL PROPERTY PRICE

Abstract

This study is undertaken to look more closely at the structure and inherent dynamics of Singapore’s industrial property prices. Essentially based on the DiPasquale-Wheaton four quadrant market equilibrium theory; a vector error correction model (VECM) is formulated to explain the dynamic relationships between industrial property price and other macroeconomic variables of interest. The proxy used for industrial property price is the industrial property price index; an index of the Urban Redevelopment Authority (URA). The independent variables are Gross Domestic Product (GDP), Composite Leading Index (CLI), Prime Interest Rate (PIR) and Transaction Volume (NT). Cointegration analysis is adopted in the study due primarily to the problem that most time series are non-stationary. All variables are first differenced stationary or I(1). The VECM clearly shows that the error correction term (ecm), the economic, financial and price variables jointly explain a high 64.35% of the variation in the changes of the industrial property price index in Singapore. The VECM is a good fit. The ecm’s coefficient has a correct negative sign and is statistically significant at the 5% level. Nevertheless, the small coefficient value of -0.0268 for the ecm suggests that it would take a long time for the system to return to its equilibrium once it has been shocked. Another variable that shows significant explanatory relationships with respect to changes in the industrial property price include those past prices (index points) in their third order lag [D(LIPPI(-3))]. The remaining variables are all fairly significant in explaining the variation of the industrial property price. They include the first, second, fourth and sixth lags of Gross Domestic Product; the first and sixth lags of Prime Interest Rate as well as the forth lag of Transaction Volume.