ECONOMETRIC APPROACHES TO EXPLORE THE RELATIONSHIP BETWEEN REAL ESTATE AND ECONOMY CYCLES

Abstract

Real estate market is always known to go through cyclical movements like the economy cycle. It is often assumed to be related to the economy performance. However, the exact relationship has remained unclear. Some studies have been done in this area, but the results varied. Thus there is a need to explore the inter-relationship to enhance our understanding of the real estate industry. This study will make use of updated data and improved econometrical approaches to investigate the relationship between the real estate and economy cycles. Real estate subsectors variables (residential and office indexes) are selected as different sub-markets often performed differently during the same period of time. And Gross Domestic Products (GDP) is chosen as variable since it is the main indicator of the economy health of Singapore. Engle and Granger Cointegration test is conducted to find out the long term contemporaneous relationship among two non-stationary time series. Granger Causality Test is employed to test the lead-lag relationship as well as the direction of causation. The results show that there is no long term equilibrium relationship between the real estate submarkets and the general economy. Granger Causality Test managed to show that there is a one way causal relationship, from residential property prices to GDP. However, there is no casual relationship among the rest of the rest of the variables with GDP. This study is accomplished with the conclusion that there is no significant link between real estate cycle and economy cycle, except some causal relationship between residential property prices and GDP.