Academic journal article Journal of Real Estate Literature

Asymmetric Behavior in Nominal and Real Housing Prices: Evidence from Emerging and Advanced Economies

Academic journal article Journal of Real Estate Literature

Asymmetric Behavior in Nominal and Real Housing Prices: Evidence from Emerging and Advanced Economies

Article excerpt

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Housing market dynamics play an important role in contemporary macroeconomic developments. Residential investment is a small but volatile component of GDP, construction is a labor-intensive industry, housing represents a sizeable share of household expenditure and wealth, and housing crises can significantly affect the financial sector and the wider economy. Hence, understanding the statistical behavior of housing prices can contribute to improving economic analysis and policymaking. The objective of this article is to investigate asymmetry in housing price series for a sample of emerging and advanced economies using both nominal and real housing price indices. The eleven emerging economies considered here have fairly developed housing and mortgage markets, even though large differences across countries remain. We classify non-OECD economies as emerging and the twenty OECD economies included in our sample as advanced. Hong Kong, Malta, and Singapore are classified as emerging economies, since our study covers a long time span during which these countries converged towards high income levels. Nevertheless, at the current juncture they can be considered as advanced.

While Cook (2006) studied asymmetries in the behavior of housing prices in the United Kingdom and Andre, Gupta, and Kanda (2016) investigated asymmetry in housing prices in the united states at the state and metropolitan statistical area (MsA) level, to the best of our knowledge no one has tested asymmetry using the Triples test (Randles et al., 1980) in real and nominal housing price cycles in a sample covering both emerging and advanced economies. Hence, by formally testing for asymmetry in a sample covering thirty-one emerging and advanced economies, our article fills a gap in the housing research literature.

We find less evidence of asymmetry in the emerging than in the advanced economies, in more than half of which we find positive steepness asymmetry in nominal housing prices, suggesting the presence of nominal downward rigidities. only three of the eleven emerging economies display the same kind of asymmetry. Hence rapid nominal price increases are in general more likely to be followed by similarly rapid nominal price falls in emerging than in advanced economies. Regarding real housing prices, we find positive deepness asymmetry in half of the advanced economies, suggesting the presence of price overshooting during booms, but less undershooting during busts. Evidence of positive deepness asymmetry is found only in three of the 11 emerging economies. Hence, in emerging economies, high peaks are more likely to be followed by similarly deep troughs than in advanced countries. While housing price adjustments may generally be milder in advanced than in emerging economies, they may be more protracted. This calls for caution on the part of investors in residential real estate during cyclical upswings in both sets of countries. Similarly, policymakers should try to contain housing price booms using an appropriate mix of macroeconomic and macroprudential instruments.

The remainder of the article is organized as follows. We briefly review the literature on the links between housing prices and the business cycle, as well as on the nonlinearity and asymmetric behavior of housing prices. We next present the methodology, describe the data, and discuss the empirical results. We close with concluding remarks.

Literature Review

HOUSING PRICES AND THE BUSINESS CYCLE

The literature documents strong relations between the housing cycle on the one hand and the business cycle (e.g., Leamer, 2007; Andre, 2010) and the financial cycle (e.g., Borio, 2012) on the other. The importance of housing market developments for the wider economy is widely recognized (e.g., Goodhart and Hofmann, 2008; Jarocinski and Smets, 2008; Iacoviello and Neri, 2010; Musso, Neri, and Stracca, 2011; Andre, Gupta, and Kanda, 2012; Gustafsson, Stockhammar, and Osterholm, 2015). …

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