Elias Oikarinen

Are REITs Real Estate? Evidence from International Sector Level Data

The aim of this study is to examine whether securitized real estate returns reflect direct real estate returns or general stock market returns using international data for the U.S., U.K., and Australia. In contrast to previous research, which has generally relied on overall real estate market indices and neglected the potential long-term dynamics, our econometric evaluation is based on sector level data and caters for both the short-term and long-term dynamics of the assets as well as for the lack of leverage in the direct real estate indices. In addition to the real estate and stock market indices, the analysis includes a number of fundamental variables that are expected to influence real estate and stock returns significantly. We estimate vector error-correction models and investigate the forecast error variance decompositions and impulse responses of the assets. Both the variance decompositions and impulse responses suggest that the long-run REIT market performance is much more closely related to the direct real estate market than to the general stock market. Consequently, REITs and direct real estate should be relatively good substitutes in a long-horizon investment portfolio. The results are of relevance regarding the relationship between public and private markets in general, as the ‘duality’ of the real estate markets offers an opportunity to test whether and how closely securitized asset returns reflect the performance of underlying private assets. The study also includes implications concerning the recent financial crisis.

Is Urban Land Price Adjustment More Sluggish than Housing Price Adjustment? Empirical Evidence

This article hypothesises that, due to factors such as thin trading and lack of publicly available data on transactions in the land market, urban land prices react more sluggishly to shocks in market fundamentals than housing prices do. Based on a vector error-correction model utilising quarterly data for the Helsinki Metropolitan Area in Finland over 1988Q1–2008Q2, the empirical analysis provides support for this hypothesis. In particular, the results suggest that new information regarding the market fundamentals is more rapidly reflected in housing prices than in land prices. Nevertheless, it is the housing price level, instead of land prices, that adjusts towards a cointegrating long-run equilibrium between housing prices, land prices and construction costs.

Measuring House Price Bubbles

Using data for six metropolitan housing markets in three countries, this paper provides a comparison of methods used to measure house price bubbles. We use an asset pricing approach to identify bubble periods retrospectively and then compare those results with results produced by six other methods. We also apply the various methods recursively to assess their ability to identify bubbles as they form. In view of the complexity of the asset pricing approach, we conclude that a simple price-rent ratio measure is a reliable method both ex post and in real time. Our results have important policy implications because a reliable signal that a bubble is forming could be used to avoid further house price increases.

Differences in housing price dynamics across cities: A comparison of different panel model specifications

This study compares a conventionally used panel data model – that does not allow for regional variations in housing price dynamics – with panel models that let the dynamics differ across regions. We concentrate on examining the momentum dynamics and the reversion speed towards the fundamental price level. Based on data over 1988–2012, the results indicate that the regional differences are generally quite small in the Finnish market. Nevertheless, in several cities the dynamics differ significantly from those indicated by the baseline model that does not allow for regional variation. In addition, the long-term coefficient on income considerably varies across regions, the coefficient being greater in the more supply-constrained cities. The results indicate that the use of panel models that assume similar housing price dynamics across regions can lead to flawed conclusions being drawn.

Empirical Application of the Housing Market No-Arbitrage Condition: Problems, Solutions and a Finnish Case Study

The often used housing price-to-income and housing price-to-rent ratios are problematic in housing market analysis and may result in misleading conclusions. Instead, the no-arbitrage condition of housing market is a theoretically sound basis to evaluate if housing prices are misaligned. Unfortunately, empirical applica-tion of the no-arbitrage condition has notable complications. This article reviews these complications and suggests some solutions to them. The use of implied expected appreciation derived from the no-arbitrage condition is recommended. It is also claimed that the real appreciation is better to use than the nominal one in the no-arbitrage computations. Furthermore, the paper shows that the maintenance costs as a fraction of housing price vary substantially in time and location, which may significantly affect the equilibrium housing price level relative to rental prices. An empirical application of the no-arbitrage relation using data from ten Finnish cities shows that housing price level in 2007 was not based on high expected appreciation. This lowers the fears for a price bubble.

Momentum and mean reversion in regional housing markets: evidence from variance ratio tests

This study adds to the literature on mean aversion and mean reversion in housing prices. In contrast with the previous related literature, the persistence and reversion characteristics are studied by computing variance ratios using Kims (2006) Wild bootstrapping and by investigating horizons up to 10 years. The variance ratios clearly indicate that housing prices do not follow random walk in any of the 15 Finnish cities included in the analysis. Instead, momentum in housing price growth is longlasting and considerable in size. Since the eventual reversion is substantially weaker than the initial mean aversion, housing is notably riskier asset in the long term than suggested by variances computed from quarterly or annual price movements. The results also show that the momentum and reversion patterns may substantially vary between regional housing markets. These differences influence the optimal housing portfolio allocation and highlight one more reason why it is complicated to use country level housing price data when analyzing the optimal portfolio allocation or housing price dynamics.

Are Public and Private Asset Returns and Risks the Same? Evidence from Real Estate Data

This article aims to investigate the similarity of public and private real estate returns and risks over the relatively long horizon using data for the U.S and the U.K. The results show evidence of a one-to-one relationship between publicly traded REIT performance and privately traded direct real estate investment performance in three out of four U.S. real estate sectors and one out of two U.K. sectors included in the analysis. The return volatilities generally do not differ significantly between the REIT and direct real estate markets regardless of sector and investment horizon. The findings have important practical implications. First, they indicate that public and private real estate investments can be considered to work as good substitutes in an investment portfolio with several years investment horizon. Second, they suggest that REIT related ETFs and derivatives could be used to hedge risks caused by investors’ direct real estate holdings or by lending institutions’ mortgage lending inventory.

Foreign investors’ influence on the real estate market capitalization rate – evidence from a small open economy

ABSTRACT This article adds to the scarce literature on the influence of international investment flows on local real estate values. We hypothesize that a greater foreign-investor presence in a real estate market results in a lower capitalization rate and examine whether this holds true in the Helsinki CBD office market in Finland. This market provides an interesting case study by being part of a small open economy, in which the presence of foreign investors has substantially varied over time. The Dynamic OLS estimations using data for the period 1990–2015 provide support for the hypothesis. The baseline results show a highly statistically significant negative impact of foreign-investor participation on the capitalization rate, the point estimates indicating that a 10% point growth in the share of foreign buyers of the total transaction volume decreases the cap rate by approximately 30 basis points.

U.S. Metropolitan Area House Price Dynamics

As the long-term elasticities and the short-term dynamics of housing prices are expected to exhibit substantial regional variation, the conventional panel data models that assume similar dynamics across regions generally are likely to be too restrictive. The aim of this study is to add to the scarce literature that utilizes panel modeling techniques which allow for regional heterogeneity in the housing price dynamics.We investigate the extent of regional differences in both the long- and short-term dynamics of housing prices across the 50 largest U.S. metropolitan statistical areas (MSAs) using quarterly data for the period 1980-2013. We apply the Common Correlated Effects (CCE) estimators of Pesaran (2006) and Chudik and Pesaran (2015) to avoid another common complication in the extant panel analyses, i.e., the potential bias caused by spatial dependence of housing market variables. In addition to eliminating strong and weak forms of cross-section dependence in large panels, these CCE estimators allow for heterogeneity in the dynamics across MSAs.We document considerable variation in the long-term elasticity of housing prices with respect to income and in the short-term dynamics across MSAs. The results also provide evidence of cointegration between regional housing prices and aggregate income. The findings have predictability and policy implications.

Risk premium, macroeconomic shocks, and information technology: an empirical analysis

This study empirically identifies the impact of various macroeconomic factors on the default risk premium. Using monthly data for the period 1970–2010 for the US, our estimations indicate that the monetary policy aggregates, risk-free interest rate, term structure of interest rates, inflation, and the state of the business cycle influence the risk premium. The results also provide some evidence in support of the hypothesis that the development of information technology has had a decreasing impact on the risk premium. As expected, various financial crises have had substantial and long-lasting effects on the premium. The results suggest that the direct impact of the subprime crisis and Lehman’s collapse on the risk premium was as large as two and a half percentage-points for a sustainable period. Foreign financial crises, in turn, have lowered the risk premium in the US market, suggesting a flight-to-safety phenomenon.