Real Activities and Uncertainty: Evidence from Real Estate Markets

Abstract

This working paper is written by Jie Cao (The Hong Kong Polytechnic University), Linjia Song (Xiamen University), Sheridan Titman (University of Texas at Austin), and Xintong Zhan (Fudan University).

This paper investigates the impact of uncertainty on the real estate sector. We propose new proxies for real estate market uncertainty using implied volatilities extracted from options on real estate ETFs. The proposed real estate (residential and commercial) uncertainty measures negatively predict investment activities. We investigate two channels that can explain this relationship and find that: real options and financing costs. First, textual analysis of real estate companies’ conference calls reveals greater perceived risk and a higher chance of project delays when uncertainty increases. Second, facing higher uncertainty, banks are more conservative in granting new loans for real estate projects.