EFFECT OF MACROECONOMIC VARIABLES ON REAL ESTATE SECURITIES RETURNS

Abstract

This research attempts to establish the short and long run effects of the macroeconomy on the real estate securities market. A total of five countries - Singapore, Hong Kong, Japan, UK and US are sampled where the macroeconomic variables assumed to correctly reflect the economy are GDP, effective exchange rate, prime lending rate, consumer price index and money supply. The multivariate cointegration test results suggest the presence of at least one long term relationship between the macroeconomic variables and real estate securities prices for all countries. However, cointegration is minimal when individual macroeconomic variables are tested. Specifically, GDP, prime lending rate and money supply have positive effects on real estate securities whereas effective exchange rate has a negative impact in the long run. However, the consumer price index is found to be both negatively and positively linked to real estate securities prices depending on the country sampled. The short run relation is tested using the EGARCH (1,1) model. The mean spillover effect is positive for growth in GDP while negative for interest rate and growth in money supply. Change in exchange rate and unexpected inflation are proven to have both positive and negative mean spillover effects. The volatility spillover effect is strong for GDP and effective exchange rate while weak for consumer price index and money supply. Portfolio holders' expectations about future values of macroeconomic variables can impact real estate securities prices and macroeconomic variables become risk factors in their portfolio substitution. Hence, it is important to study the effect of macroeconomic variables on real estate securities markets.