COINTEGRATION IN THE SINGAPORE PRIVATE RESIDENTIAL PROPERTY MARKET-SOME EMPIRICAL EVIDENCE

Abstract

This study attempts to determine if private residential property prices are co-integrated with two selected macroeconomic variables—stock prices and prime lending rates. The Johansen methodology of co-integration is implemented to test for the presence of long run contemporaneous relationships between these variables. Where co-integration between the variables is exhibited, a vector error correction model is applied to quantify the short run deviations ofprivate housing prices from their equilibrium state. A bivariate co-integration test between private housing prices and stock prices reveal an interesting relationship of co-integration. This thus follows with a vector error correction model, to study the short run dynamics of this equilibrium relationship. The coefficient on the lagged co-integrating error reveals a slow response rate. A multivariate co-integration test is then carried out to include prime lending rates, so as to incorporate the impact that prime lending rates have on private housing prices. The results reveal that private housing prices are co-integrated with prime lending rates but not with stock prices. The vector error correction model displays a slow response rate of price adjustments to the equilibrium state, in the short run. Individuals with consumption as the underlying motive for purchasing a private residential dwelling may not be as affected by the slow response in price adjustments as they are able to ride out the time needed for prices to adjust back to the equilibrium state. Investors however, have a shorter investment time horizon and hence the slow adjustment rate may indicate that long term growth in the private residential property market is not sustainable enough for them. They may hence wish to consider other forms of property related investments that may offer higher returns in a shorter period of time.