Regime Shifts in Real Estate Markets: Time-Varying Effects of the U.S. and Japanese Economies on House Prices in Hawaii

Abstract

We show that house prices may be driven entirely by the demands of one identifiable group for several years and then by demands of another group at other times. We present evidence that house prices in Hawaii were subject to such regime shifts. Prices responded to demands associated with American income and wealth for most years from 1975 through 2008. From the middle of the 1980s through the early 1990s, however, house prices responded to Japanese income and wealth. Statistical tests indicate that the regime-shifting model outperformed the constant-coefficient model. The regime-shifting model helps explain why and by how much elasticities with respect to income and wealth and volatilities of house prices in Hawaii varied over time.

Keywords: Real estate price dynamics, regime shifting