Real Estate Illiquidity and Returns: A Time-varying Regional Perspective

Abstract

This paper proposes two new measures of illiquidity for real estate markets utilising concepts from asset pricing. Segregating real estate through a regional lens, we provide an in-depth analysis of real estate returns and illiquidity for the US and UK using time-varying parameter VAR models. Density forecasts show real estate illiquidity holds prominent predictive power for returns over and above a variety of control variables. Our models reveal that illiquidity shocks significantly depress returns and are economically meaningful explaining up to 28\% of regional return variation. Network analysis uncovers substantial heterogeneities in the influence of illiquidity shocks over time with the implication that real estate investors may be able to diversify away, or hedge against, regional spillover exposure.

Keywords: Time-Varying Parameter VAR, Quasi-Bayesian Local Likelihood Methods, Liquidity, Density Forecasts, Network Connections.

JEL Classification: G12, G11, C58, R31