A Critical Review of Housing Markets

Abstract

This PhD dissertation, composed of three studies, provides a critical review of the determinants of price changes in the housing market. In the first paper, I address the counterintuitive negative risk-return relationship in the housing market, previously found in the literature. I show that the negative relationship in the US can be resolved by considering the modelling differences between aggregate and cross-sectional conditions in standard asset pricing theory. The result has implications for the application of standard finance theory towards housing markets.

In the second paper, I revisit the commonly-held beliefs that the nature of housing markets is mainly local and that local time-invariant amenities are crucial for understanding housing price dynamics. Based on the empirical evidence of the US housing markets, I show that the documented evidence in support of these arguments can be an artefact of sample size in the time series dimension of a panel data analysis. The result provides implications for empirical and theoretical research regarding the assumptions of housing market dynamics.

The third paper presents a historical review of the long-run relationship between macroeconomic factors and housing markets from 1871 to 2012. I find that century-long evidence across 10 countries has consistently favoured the role of inflation hedging in residential real estate, yet its significance has decreased in the recent regime of inflation targeting from 1990 to 2012. During the latter period, much of the variation in housing markets is linked not to inflation risk, but rather to changes in real income. The result adds a new dimension to understanding how inflation hedging benefits can change under different momentary environments. Show more