We show that a proper assessment of the linkages between real estate markets and the economy requires state of the art modelling techniques, which treat economic variables endogenously and allow for a number of long-run relationships. We therefore use a long-run structural modelling approach, which incorporates equilibrium relationships that are predicted by economic theory, in an otherwise unrestricted vector autoregressive model. The application of this approach to Swiss multifamily residential data shows that four long-run equilibrium relations exist among inflation, long- and short-term interest rates, real M2, real GDP, real construction expenditures, real market rents and capitalisation rates. Disturbances to the equilibria last for approximately five years before they completely vanish. The analysis of the short-run dynamics additionally suggests that the linkages between real estate and economic variables are bi-directional. Our findings should provide for a better understanding of the linkages and feedback mechanisms between a developed economy and its real estate markets and thereby help in the identification and quantification of both market interventions by policy-makers and risks borne by investors.
- multifamily residential
- error correction models
- cointegrated VAR
- long-run equilibrium modelling