This article examines the dynamic linkages between real estate investment trusts (REITs), which are a proxy for investment in real estate, interest rates and stock prices in Malaysia over the period 2006 to 2009. Two mechanisms have been proposed to interpret the relationship between investment in real estate and stocks. The first is the wealth effect, which states that investors with unanticipated gains in share prices will invest in real estate. The second is the credit-price effect, which states that if real estate prices increase, firms holding commercial real estate will have large unrealized capital gains, meaning that investors will bid up the equity value of the firm. This suggests that the housing market will lead the stock market. Over the period 2006 to 2009, real estate and stock prices have surged in tandem in Malaysia. We find evidence of a wealth effect in the short-run, while in the long-run for some REITs we find support for the wealth effect, while for others we find evidence of feedback effects between real estate and stocks. This finding is consistent with a spiralling upturn in both prices and provides support for both effects operating together. The results lend support to concerns that the Malaysian real estate market is characterized by an asset bubble and that a decline in the stock market could burst the Malaysian real estate bubble.
Keywords: REITs, interest rates, stock prices, Malaysia
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This article attempts to answer the question: Does the real estate market lead the stock market or does the stock market lead the real estate market in Malaysia? Specifically, we test whether there is a causal relationship between Real Estate Investment Trusts (REIT), stock prices and interest rates in Malaysia. While our primary focus is on the relationship between real estate and stock markets, employing bivariate analysis is not satisfactory because the relationship between the variables might be spurious reflecting common factors (Quan & Titman, 1999). We include the interest rate, which is likely to be a key determinant of an investor's ability to borrow to finance investment in the housing market and stock market (Chen, 2001), as an additional variable. Data on direct investment in real estate is not available, but one can indirectly trade real estate through REITs. Their primary business is managing groups of income-producing properties and they distribute most of their profits as dividends to shareholders. REITs distribute 90 per cent of taxable profits as dividends. In contrast to unit trusts, REITs are actively traded on stock exchanges and form an avenue for exploring the linkages between stock and real estate investments (Subrahmanyam, 2007).
To this point most studies of this sort have focused on advanced markets (Ansari, 2006; Green, 2002; Kakes & Van den End, 2004; Kapopoulos and Siokis, 2005; Sutton, 2002). There are few studies of the dynamic linkages between real estate and stock markets for developing markets or Asian markets (Chen, 2001; Ibrahim, 2010; Sim & Chang, 2006). There are no existing studies for Malaysia. Malaysia is an interesting country in which to examine the relationship between real estate, stock prices and interest rates because there has been a parallel surge in real estate and stock prices, since the Global Financial Crisis, giving rise to speculation of a financial bubble (Bryson & Kamaruddin, 2010).
Two mechanisms have been proposed to interpret the relationship between real estate prices and stock prices (Kapopoulos & Siokis, 2005). The first is the wealth effect. The wealth effect suggests that households with unanticipated gains in share prices will increase the amount of housing. Hence, the stock market will lead the housing market. This will occur through two channels because housing can be considered to be both a consumption and investment good. …