Global Cities and Local Housing Market Cycles
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Global Cities and Local Housing Market Cycles Alessandra Canepa1,2 · Emilio Zanetti Chini3 · Huthaifa Alqaralleh4
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract In this paper, we consider the dynamic features of house price in metropolises that are characterised by a high degree of internationalisation. Using a generalised smooth transition (GSTAR) model we show that the dynamic symmetry in house price cycles is strongly rejected for the housing markets considered in this paper. Further, we conduct an out-of-sample forecast comparison of the GSTAR with a linear AR model for the metropolises under consideration. We find that the use of nonlinear models to forecast house prices, in most cases, generate improvements in forecast performance. Keywords House price cycles · Dynamic asymmetries · Nonlinear models JEL Classification C10 · C31 · C33
Introduction During the last decade, housing markets have been characterised by a high degree of instability. This has particularly been the case in large metropolitan areas where real estate markets have experienced dramatic swings which resulted in one of the deepest recessions the world has experienced since the great depression in the 1930s. Partially Alessandra Canepa
[email protected] Emilio Zanetti Chini [email protected] Huthaifa Alqaralleh [email protected] 1
Department of Economic and Statistics Cognetti De Martiis, University of Turin, Lungo Dora Siena 100A, 10153 Turin, Italy
2
Department of Economics and Finance, Brunel University London, Uxbridge, UB8 3PH, UK
3
Department of Economics and Law, Sapienza University of Rome, Rome, Italy
4
Department of Economics, Business and Finance, Mutah University, Karak, Jordan
A. Canepa et al.
motivated by these events, several authors have investigated the cyclical behaviour of real estate prices. Housing markets are known to be prone to boom and bust episodes. In a typical expansion phase, transaction volumes are high, average selling times are short, and prices tend to rise rapidly. In a bust period, transaction volumes are low, average selling times are long, and price growth is moderate or negative. The empirical literature on housing markets recognises that the real economy is vulnerable to house price swings, but it is less assertive about the features of cyclical patterns. For example, Muellbauer and Murphy (1997) explore the behaviour of house prices in the UK. The authors suggest that transaction costs associated with the housing market cause important nonlinearity in house price dynamics. Further, Seslen (2004) argues that households exhibit rational responses to returns on the upside of the market, but do not respond symmetrically to downturns. On an upswing of the housing cycle, households exhibit forward-looking behaviour and are more likely to trade up, with equity constraint playing a minor role. On the other hand, households are less likely to trade when prices are on the decline causing stickiness on the downside of the housing market cyc
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