Value and momentum in the cross section of housing market returns of New Zealand

Abstract

This paper examines if there are value and momentum effects in the New Zealand housing market across different regions. It is found that the short-term momentum effect exists with the winner regions in the past year outperforming the loser regions in the following year by 2.06%, mainly from capital gains, after adjusting for the market risk. The house returns exhibit long-term reversal with the winner regions in the last six years underperforming the loser regions in each of the next eight years due to lower capital gains. A value effect is present with regions with high rent-price ratios outperforming those with low rent-price ratios in each of the next seven years due to persistent higher rental yields. However, both the reversal effect and value effect can be explained by the market risk.

Keywords:

• Momentum
• value
• rental yield
• capital gains
• housing market
• new zealand

JEL:

• G11
• G12
• R32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 In a four-factor asset pricing model for housing returns proposed by Beracha and Skiba, 2013, a psychologically motivated momentum factor is included.

2 The alpha is 1.93% per year and is significant at the 10% level if the sorting is based on total returns.

3 Our momentum, reversal and value results are all based these formulas, without taking the log of returns. However, when computing the summary statistics for total returns and capital gains in Table 1, which are based on monthly returns, we use log monthly returns.

4 This is the way REINZ calculates the market returns for the country. This is similar to the stock market indices which are portfolios of individual stocks weighted by their capitalisations.

5 The rental growth rate for each month t is calculated as $g_t=\log \frac{R_t}{R_{t-1}}.$The annual growth rate is the average monthly growth rate within the year multiplied by 12.