Academic journal article International Journal of Management

The Impact of Monetary Policy and Bonds Supply on Real Estate Prices: An Empirical Study

Academic journal article International Journal of Management

The Impact of Monetary Policy and Bonds Supply on Real Estate Prices: An Empirical Study

Article excerpt

This research develops a two-goods and three-assets portfolio balance model to study the influence of expansion in both monetary policy and bond supply on real estate prices. We perform our analysis using data for Taiwan from January 1987 to August 2002. All the data used are from Taiwan Financial Statistics Database and the Price Statistics Database. Co-integration analysis is used to test the long-run relationships among the key economic variables. Results of this analysis show that the expansion of monetary policy brings about a decrease in real estate prices, while growing domestic bond supply causes real estate prices to increase. After a vector error correction was made, the evidence indicates that the long-run causality between monetary policy and real restate prices is bi-directional, but that there is an unidirectional 'causal link' from domestic bond supply to real estate prices.

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1. Introduction

In recent years, empirical research has been conducted on the relationships between real estate prices and general macroeconomic variables. Some prior real estate price work refers to these empirical studies. Chaudhry et al. (1999) examined the linkages of real estate prices and important financial assets, such as treasury bonds. Benson et al.(1999) analyzed the impact of exchange rates and price indices upon real estate prices. Darrat and Glasock (1993) proposed an efficiency hypothesis of real estate markets and focused their research on the links among real estate returns and the relevant financial and economic variables, including fiscal and monetary policy variables, the stock price index, and the term structure of interest rates, etc. Drake (1993) presented how real personal disposable income affects the fluctuations of housing prices in the United Kingdom. Based upon a model of firms' investment spending behavior, McCue and Kling (1994) employed a Vector Auto Regression (VAR) model incorporating prices, interest rates, output, and investments, with the aim of exploring the link between these macroeconomic variables and real estate returns. Cheung et.al. (1995) tested the causal relationships between sale price changes and rental rate changes in Hong Kong's real estate market.

Some papers have developed a theoretical supply and demand model of property markets and then carried out empirical research. The macroeconomic variables in Quigley (1998)'s model are property prices, employment, and income, and the empirical results of OLS support a positive impact of economic fundamentals on property prices in 41 cities in the U.S. from 1986 to 1994. Kasparova & White (2001) amended the supplyside and demand-side macroeconomic variables, putting in the interest rate but removing employment. Their paper analyzes the Granger causality between GDP and house prices from the ECM, and it investigates the long-run relationship by cointegration after selecting European Union countries from 1970 to 1998. Carreras-i-Solanas et. al. (2004) built up a model of decomposing housing demand into consumption and investment components, which explain the relationship among house prices, rent, income, nominal interest rate, and CPI. The empirical methodology of their paper applies traditional regression without considering the issues of stationarity.

Most of these past studies unfortunately set up the theoretical model consisting of just one market, the real estate market, while no studies have explored the implications of systematic open economic models of macroeconomic variables upon real estate prices. In addition to being influenced by asset markets in an open economy, interest rates and real estate prices are affected by goods and foreign exchange markets. Therefore, this paper intends to theoretically explore the determination of real estate prices under open economics in an effort to revise the portfolio balance model existing of two goods and three assets as established by MacDonald (1988). …

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