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New in Town: Demographics, Immigration, and the Price of Real Estate

Author

Listed:
  • Dragana Cvijanovic

    (LSE - London School of Economics and Political Science, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Jack Favilukis

    (Department of Finance - LSE - London School of Economics and Political Science)

  • Christopher Polk

    (Department of Finance - LSE - London School of Economics and Political Science)

Abstract

We link cross-sectional variation in both realized and expected state-level house price appreciation to cross-sectional variation in demographic changes. In particular, we extract two components of expected population growth: 1) a natural component due to predictable demographic changes related to fertility and mortality rates and 2) a non-natural component due to immigration. Our analysis shows that only the second component forecasts cross-sectional variation in state-level house price appreciation. We find that the sensitivity of both realized and expected returns to these demographic changes is stronger for states with greater population density, consistent with population growth actually causing the price appreciation rather than merely being correlated with some other phenomenon. We also document that building permits anticipate a portion of future population growth and house price appreciation. However, lagged measures of building activity do not subsume the ability of our expected immigration proxy to forecast price appreciation. Our findings are consistent with fundamentals driving an economically important portion of cross-sectional variation in state-level housing returns. However, markets appear to significantly underreact to the component of fundamentals that is arguably more difficult for market participants to anticipate.

Suggested Citation

  • Dragana Cvijanovic & Jack Favilukis & Christopher Polk, 2012. "New in Town: Demographics, Immigration, and the Price of Real Estate," Working Papers hal-00686122, HAL.
    • Handle: RePEc:hal:wpaper:hal-00686122
    as

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