Housing Price Dynamics in Time and Space: Predictability, Liquidity and Investor Returns

Posted: 10 Feb 2010

See all articles by Min Hwang

Min Hwang

George Washington University - Department of Finance

John M. Quigley

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased); University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased)

Date Written: February 10, 2010

Abstract

It is widely accepted that aggregate housing prices are predictable, but that excess returns to investors are precluded by the transactions costs of buying and selling property. We examine this issue using a unique data set - all private condominium transactions in Singapore during an eleven-year period. We model directly the price discovery process for individual dwellings. Our empirical results clearly reject a random walk in prices, supporting mean reversion in housing prices and diffusion of innovations over space. We find that, when house prices and aggregate returns are computed from models that erroneously assume a random walk and spatial independence, they are strongly autocorrelated. However, when they are calculated from the appropriate model, predictability in prices and in investment returns is completely absent. We show that this is due to the illiquid nature of housing transactions. We also conduct extensive simulations, over different time horizons and with different investment rules, testing whether better information on housing price dynamics leads to superior investment performance.

Keywords: Housing Market Liquidity, Price Discovery, Spatial correlatioin

JEL Classification: E31, C23, R32

Suggested Citation

Hwang, Min and Quigley, John M., Housing Price Dynamics in Time and Space: Predictability, Liquidity and Investor Returns (February 10, 2010). Journal of Real Estate Finance and Economics, Vol. 41, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1550787

Min Hwang (Contact Author)

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

John M. Quigley

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased) ( email )

Berkeley, CA 94720-3880
United States
510-643-7411 (Phone)
510-643-7357 (Fax)

University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased) ( email )

Berkeley, CA 94720-1900
United States

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