The Information Content of the Yield Curve for Predicting Future Property Performance

Empirical research has established the close relationship between economic conditions and property market activity. This work has provided evidence on the economic and financial indicators that can provide early signals for the direction of property rents, capital values and returns. The present paper seeks evidence on the usefulness of the yield curve or the term structure of interest rates as an additional indicator that provides signals for the future performance of the property sector. Applied economists have long regarded the yield curve as a predictor of economic activity. Given the significance of this indicator to predict economic activity this study examines the information content of the yield curve for future property market performance in the UK. The paper initially provides the stylised facts of the linkages between the wider economy and property performance. Subsequently, it explains the relationship between the term structure of interest rates, economic activity and the property market. The empirical investigation to accomplish the main objective of the paper makes use of non-parametric tests and econometric analysis. It pays particular attention to out of sample forecast performance of models that include the term structure of interest rates. Finally an evaluation is made as to whether this indicator is useful in predicting the future course of property performance.