Cointegration Analysis of Singaporeís Residential Market

Several important events such as the Asian Financial Crisis in 1997 and 11th Sep Attack in New York, has further heightened our concern for the conditions in the real estate markets, in particular for the housing market. This paper utilizes cointegration and errorcorrection models and Granger causality tests to investigate the dynamics of the Singapore private housing market. Consequently, private housing prices are found to be cointegrated with GDP, prime lending rates and private housing commencements and private housing rents, indicating that they share a common stochastic trend. In the short run, it is shown that the error correction mechanism plays an important adjustment role in the fluctuation of prices in order to bring the deviations in prices to return to the long-run equilibrium path. However, the adjustment is very slow due to the inefficiency of the real estate market. Furthermore, our results also show that, in the short run, the conditions in the financial market and macroeconomic economy can produce more significant influence on the number of housing commencements, while the price and supply factors of the real estate market can explain more about the short-run dynamics of rents.