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Property Market Analysis: Predicting The Effect Of Interest Rate Changes On Property Values
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Why House Prices Rise in the Covid-19 Crisis: A Five-Country Study of Real Interest Rate Hypotheses
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Received: August 20, 2021. / Modified: September 28, 2021 / Received: September 29, 2021. / Date of publication: October 5, 2021
In the wake of the COVID-19 outbreak, many developed countries have seen a sharp increase in house prices. It provides a unique opportunity to test real-world interest rate hypotheses, as “synchronized” price recoveries reveal common causes of house price growth across the economy. The study analyzes five economic downturns to test this hypothesis: Australia, Canada, the European Union, New Zealand, the United Kingdom, and the United States. Data from Q1 2017 to Q1 2021. The results show that real interest rates have a negative and significant effect on house price growth after controlling for economic growth factors, unemployment factors, and fixed cross-border effects. Specific results for five housing markets show that a 1% decrease in real interest rates led to a 1.5% increase in house prices over the period, ceteris paribus. It also presents general evidence that rejects the New Zealand economic growth and migration hypothesis. This finding has broad practical implications for housing policy and indicates how to address the affordability issue.
Since the global financial crisis, urban scholars have begun to study the global housing affordability crisis [1, 2]. IMF researchers also found that house prices were synchronized across countries, and they argued that this was due to the influence of global interest rates [3, 4]. The epidemiology of COVID-19 offers a semi-experimental test to test their hypotheses.
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Since the end of 2019, a deadly disease called COVID-19 by the WHO has spread around the world. It has killed millions of people and is a phase of the world economy. Prolonged shutdown orders in many cities are severely disrupting business operations. Unemployment in many advanced economies has reached record levels. For example, the unemployment rate in the USA and Canada has increased to 14.8% and 13.7% by 2020, according to the OECD . However, contrary to many expectations, house prices in many countries have risen rather than fallen in this disaster.
Contrary to traditional theoretical predictions about the negative impact of the epidemic on the housing market , housing prices in many countries have increased sharply after the outbreak of COVID despite negative GDP growth rates. Unemployment is at an unprecedented high and business operations have been severely disrupted. It reported annual house price growth of 22.1%, 13.2%, 10.8%, 10.2% and 8.3% in the first quarter of 2021 in New Zealand, the United States, Canada, the United Kingdom and Australia, respectively. The Mack & Martínez-García International Homes Price Database  also shows that 80% and 88% of the 25 sample countries recorded real house price growth during the same period.
The counter-intuitive recovery in global house prices following the outbreak of COVID is believed to be a consequence of the central bank’s counter-cyclical measures to cut interest rates. Shahin and Girgin concluded that the central bank will reduce the interest rate by 207% by 2020 . Most of these occurred in the first quarter of 2020, when 54 central banks tried to help the economy by cutting interest rates 73 times. Some to historic lows. There is still no concrete evidence to study this hypothesis of monetary policy during the epidemic period [11, 12]. This article aims to test the hypothesis using a cross-border panel regression analysis, and provides a quasi-test to test the hypothesis that the synchronization of interest rate cuts by central banks around the world after the outbreak of COVID. .
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The study looked at five countries that saw strong house price growth following the COVID outbreak. They are in alphabetical order of Australia, Canada, New Zealand, Great Britain and the United States. The paper is prepared as follows. The second part is a review of the literature on the study of the hypothesis of monetary policy. Section 3 describes the research materials and methods used. Section 4 presents the results of practical tests. Section 5 discusses the conclusions and implications. Part 6 ends.
Many previous studies have shown that debt is a common key to the housing bubble. Making it cheaper to borrow (decrease in real interest rates) or easier to borrow (decrease in the lending rate or lending rate) can be two main monetary policies that create more mortgage debt. For example, Mian and Sufi (2011) found “evidence of a strong link between asset prices and household borrowing” (, p. 2155), while Favara and Imbs (2015) “why credit to home equity results from chain expansion” ([ 14] p. 984).
The negative impact of real interest rates on housing prices has been comprehensively studied in one country study [15, 16, 17, 18, 19, 20]. Mayer and Sinai (2009) explain the following effects: “Lower real interest rates reduce consumer spending due to lower debt financing costs as well as the opportunity cost of equity investments. At home. In the real world, logging elephants are the aggression of speeding midgets. ).
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Ryan-Collins (2019) further explains the relationship in terms of a housing-financial feedback loop, whereby house prices rise when unlimited loans and money flow into a limited supply of real estate. However, higher home prices increase the loan. He has found a strong, qualitative relationship between mortgages and property prices in advanced economies since the 1870s, and claims that in the past “policymakers have focused too much on supply-side issues such as insufficient new home building, excessive immigration and restrictive planning laws.” ( p. 19).
Another study on monetary policy hypotheses is about the ease of borrowing. For example, Favilukis, Ludvigson, and van Nieuwerburgh (2017) showed the effect of easing borrowing on house prices . Khandani, Lo, and Merton (2013) suggested that if housing finance is not constrained, it may lead to systemic risks due to the ratcheting effect of house price growth  .
There are also a number of cross-country studies designed to test the monetary policy hypothesis. Ahearne et al. (2005) found that some financial conditions, such as low interest rates, sufficient liquidity, and financial regulation, are common during previous house price increases, but they did not perform any practical tests and cannot rule out other explanations. . Factors such as business and demographic crisis . Other cross-border imperial studies have encountered similar problems in controlling for other factors. Almost all of these studies attempt to include relevant variables in the regression model, and most include real interest rates or mortgages as explanatory variables. For example, Tsatsaronis and Zhu (2004) found that house prices depend mainly on inflation, the yield curve and bank credit , while Ertgert and Mihaljek (2007) showed that house prices are determined by GDP per capita. Real interest. Housing loans and demographic factors, etc., . Algieri (2013) showed that changes in real income, long-term interest rates, stock prices and inflation are determinants of house prices . Vogiazas and Alexiou (2017) also found that housing prices depend on real GDP growth, bank credit growth, long-term bond yields, and the real effective exchange rate . However, Tripathi (2019) found that real interest rates do not affect real estate prices . On the other hand, there is still no consensus on the monetary policy hypotheses.
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It should be noted that these studies did not control for confounding.
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