Abstract
This article investigates the dynamic conditional correlation between price and rental among four types of real estate markets, namely housing, retail, office and factory. In the case of Hong Kong (from January 1993 to December 2008), the Dynamic Conditional Correlation Multivariate Stochastic Volatility (DCC–MSV) model and Bayesian Markov Chain Monte Carlo (MCMC) are employed to capture the volatility and time varying correlation of property price and rental in each market. The empirical results demonstrate that the volatilities of price are significantly larger than those of rental for each type of real estate markets throughout the whole sample period. Besides, the findings indicate that the correlations between price and rental are time-varying, and the average correlation in the housing market is much larger than those in the other three markets. Also, the conditional correlations in the factory market are the most volatile, while those in the office market are relatively stable. Additionally, two particularly volatile periods have been identified in and around 1997 and 2003.
Notes
1 To conserve space, we do not present the details of the Philips–Perron (PP) tests here; however, all the results are available from the corresponding author upon request.
2 In October 1997, the Chief Executive of Hong Kong – Tung Chee Hwa announced a 5-year land sales programme that will provide 120 hectares of land for private housing up to March 1999, and an additional 260 hectares in the following 3 financial years. In addition, there will be about 285 hectares of land for public sector housing over the same period. Together with developments initiated by private land owners and those associated with railway developments and public housing redevelopment, this level of supply will translate into a production pattern rising from around 70 000 flats in 1998 to more than 85 000 flats a year with effect from 1999. The Steering Committee on Land Supply for Housing is finalizing a 10-year programme, which includes site specific information for the first 5 years, with the aim of sustaining annual production of at least 85 000 flats. This programme will be rolled forward annually. Source: Tung Chee Hwa, ‘Building Hong Kong For a New Era’ The Hong Kong Special Administrative Region of the People's Republic of China.