The Link Between Property And Economy

This paper supplies empirical evidence of the long-term relationships between the property markets in the UK and Germany and their macroeconomy. In so doing, findings contribute to improve the evaluation of the properties¥ behaviour from a macroeconomic point of view. The analysis is based on monthly data for the examination period between January 1993 and Juli 2007. In order to choose convincing variables the selection of the macroeconomic factors is provided by coefficients tests for omitted or redundant variables as well as by Granger causality tests. As the isolation of property-related earnings of institutional investors¥ porfolios is still a serious problem, the majority of academic literature is focused on estimating REIT returns. In contrast, this paper examines direct property indices, which are determined by an appraisal based methodology. In this way, it is possible to explicitly take into account the heterogeneity of the underlying real estate objects. Deviating from the existing studies, this manuscript is interested in the interdependency between the macroeconomy and the German and UK property markets in a long-term view. For this purpose we apply the cointegration concept to vector autoregressive (VAR) models using the vector error correction framework (VECM) according to Johansen (1988). To the best of our knowledge the use of this approach in the context of real estate investments is so far missing in scientific literature.