Do House Price Spillover Across Main Cities of Canada and China? - Evidence from Causality Analysis

Abstract

Recently, soaring housing prices in major Canadian cities such as Vancouver and Toronto have raised concerns among residents and policy makers. There is a wide spread belief that the overheating of these real estate markets is due to foreign buyers. If confirmed, the link between outside investments and local markets could have serious implications. However, direct verification is difficult since the data of nationalities of the purchasers is not available, at least until recently. In this paper, we use statistical analysis to address this issue indirectly by studying causal relationships between Toronto, Vancouver and Shanghai and examining possible spillover effect of house price development in Canada and China cities from 2009 to 2016. We use unit root test, co-integration test, error correction model and Hsiao’s Granger test to explore the long- and short-run causal relationships. We found that both Toronto and Vancouver housing markets have a causal relationship with the Shanghai housing market. And the causality relationship from Chinese to Canadian housing markets supports the argument that there is a direct housing price spillover effect through Chinese investment in Canadian real estate over the last decade. However, the response of Toronto and Vancouver housing markets to the Shanghai market differs significantly. Between Toronto and Shanghai, both long- and short-run causality relationships exist, while between Vancouver and Shanghai, only short-run causality is found. A possible explanation is that more immigrants and greater real estate investment move to Vancouver in recent years, leading to higher price volatility in Vancouver than that in Toronto.

Keywords: House price, Spillover effect, Co-integration, Error Correction model, Granger causality

JEL Classification: R21, R31