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Residential Investment and Interest Rate: A Nonlinear Analysis in Sweden

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  • Zan Yang

Abstract

In the traditional model, an increase of interest rate will lead to a decreasing investment level because of decreasing net present values of investment projects. However, when the impact of uncertainty in the presence of irreversibility is considered, the value of waiting is introduced to the model. The investor has ìoptionî to delay an investment decision in order to wait the arrival of new information about market condition. The effect of interest rate on investment could be nonlinear depending on the value of the real options. In this study, I empirically examine the nonlinear effect of interest rate on investment in the Swedish housing market. Markov ñ Switching regression is used to characterize time ñ varying parameters of an error ñ correction model for housing investment. It models a nonlinear regime ñ switching phenomenon to characterize housing investment dynamics within regimes and during the transition between regimes in response to the interest rate volatility.

Suggested Citation

  • Zan Yang, 2009. "Residential Investment and Interest Rate: A Nonlinear Analysis in Sweden," ERES eres2009_152, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2009_152
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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