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Linkages between property asset returns and interest rates: evidence for the UK

Brooks, C. and Tsolacos, S. (2001) Linkages between property asset returns and interest rates: evidence for the UK. Applied Economics, 33 (6). pp. 711-719. ISSN 1466-4283

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To link to this item DOI: 10.1080/00036840122812

Abstract/Summary

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:35971
Publisher:Taylor & Francis

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