Impact of Macroeconomic Factors on Residential

Property Prices

BSC (HONS) – INTERNATIONAL BUSINESS

FINANCE – LEVEL 2

RESEARCH METHODS AND DATA

ANALYSIS IN FINANCE - DFA 2022Y(3)

DR. USHAD SUBADAR

RD
23 JULY 2023

Submitted by:

MANDHUB MAYUR – 211 7126

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Table of Contents
Introduction ............................................................................................................................................... 2
Statement of the Problem .................................................................................................................. 2
Purpose of the Study.......................................................................................................................... 3
Literature Review ....................................................................................................................................... 4
Hypotheses........................................................................................................................................ 5
Research Design................................................................................................................................. 5
Sampling ............................................................................................................................................. 5
Data Collection.................................................................................................................................... 5
Variables Measurement ...................................................................................................................... 6
Data Processing .................................................................................................................................. 6
Model Specification ............................................................................................................................ 7
Limitations......................................................................................................................................... 8
References......................................................................................................................................... 9
Gantt Chart ............................................................................................................................................... 12

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 Impact of Macroeconomic Factors on Residential Property
Prices
Evidence from European nations and Mauritius

Introduction
In recent years, there has been increasing interest in understanding the relationship between
macroeconomic factors and residential property values. For instance, according to Quigley (1999)
and Wang (2003), the real estate market and property values are highly correlated with general
economic cycles. Numerous studies, including those by Hon-Chung (2009), Ludwig and Slok
(2004), Case et al. (2005), Bardhan et al. (2007), Goodhard and Hofmann (2007), and Zhang and
Wu (2008), have shown that among macroeconomic variables and affected real estate prices, GDP,
unemployment rate, share index, current account of a country, demographic variables, household
income, industrial production, and household consumption were the most important variables.

Thus, this research aims to investigate the intricate interplay between macroeconomic indicators
and residential property prices. Indicators such as GDP, Inflation rate, Interest rate, and
Unemployment rate were taken into consideration as they are said, after analysis numerous studies,
to impact more on property prices.
Also, the study will be based upon the residential property prices of selected European nations and
the country-island of Mauritius.

Statement of the problem

Despite existing literature delving into various aspects of real estate markets and macroeconomics,
there remains a gap in the understanding of how macroeconomic factors impact residential
property prices in different regions, in the context of selected European countries and particularly
the unique economic landscape of Mauritius. While previous studies have highlighted the
influence of factors such as inflation, interest rates, GDP growth, and employment on real estate
markets, there is a need for more comprehensive analysis that account for regional variations and
different economic conditions.

Therefore, the main problem this research addresses is: What is the impact of those fundamental
macroeconomic factors on residential property prices in those selected counties in Europe and
Mauritius, and how do these impacts differ across these two regions?

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Purpose of the study
This study aims to achieve the following objectives:

 Identify key macroeconomic drivers – This study intends to identify the specific
macroeconomic factors that influences residential property value in both European and
Mauritian contexts. By analyzing a range of indicators such as inflation, interest rates, GDP
growth, and employment, the research aims to pinpoint the drivers of price fluctuations in each
of the two regions.

 Provide insights for Stakeholders – This research will help to offer insights for various
stakeholders, including investors, developers and real estate professionals. By understanding
the specific macroeconomic drivers of property price variations, stakeholders can make
informed decisions to manage risks and optimize their investments.

 Contribute to Economic Literature – By offering a thorough analysis of the macroeconomic-

residential property price relationship in both selected developed European nations and
developing economy of Mauritius, this study attempts to be an addition to the body of existing
economic literature. The results might help to improve economic theories about real estate
markets and their receptivity to macroeconomic shifts.

 Support Policy Formulation – The research effort hopes to provide information through its
findings that will help to formulate policies targeted at stabilizing real estate markets,
guaranteeing sustainable growth, and improving housing affordability. The findings of the
research can be used by policy makers to create policies that can aid to lessen the negative
effects of macroeconomic volatility on the cost of properties.

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Literature Review

The real estate market plays an important role in the economies of both developed and
developing countries. Numerous elements, including macroeconomic conditions, have an
impact on the cost of residential property values. This review of the literature looks at the
research that has been already been done on the effects of the selected macroeconomic factors
on the pricing of residential properties.

For instance, according to Bardhan et al. (2007), the GDP is the most important factor
influencing the real estate demand. Zull Kepili Izati and Masron (2011) also investigated the
development of real estate prices and GDP. In their study, they compared the relationship
between real estate prices, foreign investment growth, and GDP in Malaysia and South Korea.

Other authors also investigated the elements that influenced the rental price of real estate in
European towns. They discovered that GDP and unemployment were statistically strongly
related to business real estate rental prices. D’Arcy et al. (1994) reached similar conclusions
after analyzing factors related to the price of real estate prices in 20 European locations from
1982 to 1993. According to the findings of the study, GDP and unemployment are the most
important factors influencing the price of real estate in the selected cities.

Also, Akbari and Aydede (2012) found that the real estate prices in European countries
increased by the end of 2008 due to low interest rates, which enabled buyers to purchase
properties despite limited financial resources. Another study carried out by Jacobsen and Bjorn
(2005) found that interest rate, unemployment, household income, and residential real estate
construction were significant factors influencing real estate prices.

Last but not least, Follain (1981) and Feldstein (1992) suggested that inflation had a
detrimental influence on the demand and housing investments, however Andrews (2010) found
rising trends in housing prices after a shift in inflation in both directions. Nielsen and Sorensen
(1994), on the other hand, discovered that rising inflation stimulates home investment
motivation because of the falling real user cost after taxes. As highlighted in Panagiotidis and
Prinztis (2016). There are conflicting opinions on the actual effect on inflation on the housing
market.

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Hypotheses Developed

 H1: The gross domestic product (GDP) has a significant impact on residential property price.
 H2: The inflation rate has a significant impact on residential property price.
 H3: The interest rate has a significant impact on residential property price.
 H4: The unemployment rate has a significant impact on residential property price.

The Research Design:

Sampling
The sample comprised data and information on residential property prices from selected European
Countries and Mauritius.

 Panel Data would be considered where the data would be observed on a quarterly basis, in
order to get a sample which is significant enough.

 Time Observation: 2014 – 2019

Data Collection
 For this study, published secondary data on GDP, inflation, interest rate, unemployment rate
and residential property prices would be collected for the European context from reputed
sources like for instance, OECD stats.
 For Mauritius, the same would be applied, published secondary data would be used for the
macroeconomic indices and residential property prices from sources like statsmauritius.
 For Residential property prices, if necessary, primary data collected through data collection
tools like questionnaires and surveys would be used for the study.

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Variables measurements
 Gross Domestic Product – Real GDP Rate
 Inflation – Consumer Price Index
 Interest rates – Real Interest Rate
 Unemployment – Unemployment Rate
 Residential Property Prices – Residential Property Price Index (RPPI)

Data Processing

The data collected would be checked for accuracy and analyzed using the statistical software
Eviews 12. Also a multiple linear regression model analysis would be used. This type model would
be good in explaining the direction of the relationship between variables used in the study like for
example, through the utilization of coefficients such as the correlation, coefficient of determination
and all.

Also an important aspect to be noted is that, before performing a regression analysis, there are
important assumptions and tests that need to be undertaken such as:

 There should be no multicollinearity between the independent variables otherwise if they are
highly related then the influence of each independent on the dependent would not be found.
Thus to be able to measure it, the Variance Inflation Factor (VIF) would be used to measure
collinearity. (To ensure constant is less than 1)

 The error terms should be homoskedastic, that is, the variance of the errors should be constant
across the observations. Thus, the Breusch Pagan would be used to verify this statement.

 The error across observations should be independent, in other words, the errors cannot have
serial correlation or autocorrelation. Thus, in order to verify autocorrelation, the Durbin
Watson test would be put into use.

 There is a need to ensure if whether the variables are stationary or non-stationary. When
performing the regression, we need to have the variables which are stationary, mainly to be
able to use those variables to do forecasting. So, a statistical test known as the Unit Root Test
would be used to verify if the variables are stationary or not, due to the claim that panel data
is used for this study.

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After satisfying the above assumptions, the regression equation can now be constructed
and modelled as shown below:

Model specification

Y = β0 + β1 (GDP) + β2 (INF) + β3 (INR) + β4 (UNEMP) + ε

Y = Residential Property Prices

β0 = Constant
GDP = Gross Domestic Product
INF = Inflation Rate
INR = Interest Rate
UNEMP = Unemployment Rate

ε = Error term
β1, β2, β3, β4= Regression Coefficients

After construction of the model, statistical tests would be carried out on the software Eviews12
and analysis of descriptive statistics can be done through the results obtained. And also, without
forgetting, carry out hypothesis testing at 1% or 5% significance level to see whether the null
hypothesis is accepted or rejected in order to give out a conclusion.

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Limitations of the study
There may be various drawbacks to this study:

 Firstly, it is possible that the nature of the data collected had an unexpected impact on the
findings. As a result, the model’s ability to establish a solid link between property prices and
GDP, inflation, interest rate, unemployment would be limited.

 Secondly, other factors impacting property prices would not be isolated in the study. For
example, security, population growth, land policies, foreign interest rates and tourism could all
have had a substantial impact on property values.

 Lastly, the study’s sample and time frame may have been tiny and constrained. There is a
chance that the sample size may not be representative of the population under study. The six-
year span may also be insufficient as most policy actions can take years to have an impact on
its economy.

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References

Zhang, Y.L., & Wu, J. (2008). Study on periodical correlation between real estate market and stock
market in China. Chinese Real Estate, 29-31

Goodhart, C., & Hofmann, B. (2007). House Prices and the Macroeconomy, Implications for
Banking and Price Stability. Oxford: University Press.

Bardhan, A., Edelstein, R, & Tsang, D. (2007). Global Financial Integration and real Estate
Security Returns. Real Estate Economics, 36 (2), 285-311.

Case, E. K., Quigley J. M., & Shiller, R. (2005). Department of Economics. The Berkeley
Electronic Press, 5(1), 1-29

Ludwig, A., & Slok, T. (2004). The relationship between stock prices, house prices and
consumption in OECD countries. Sonderforschungsbereireich, 504, 1-26.

Hon-Chung, H. (2009). The Impact of Property Market Developments on the Real Economy of
Malaysia. International Research Journal of Finance and Economics, 30, 66-86.

Wang, P. (2003). A frequency domain analysis of common cycles in property and related sectors.
The Journal of Real Estate Research, 25(3), 325-346.

Quigley, M. J. (1999). Real Estate Prices and Economic Cycles. International Real Estate Review,
2(1), 1-20.

Zull Kepili Ezati, E., & Masron, T.A. (2011). Real Estate–Foreign Direct Investment–Growth in
Malaysia: Re-Framing Eclectic Paradigm. IPEDR, 7, 110-114.

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D'arcy, E., McGough, & T., Tsolacos, S(1994). Modelling the Determinants of Office Rental
Values in Major European Cities. United Kingdom: The University of Reading

Akbari, A., & Aydede Y. (2012). Effects of Immigration on Housing Prices in Canada. Working
Paper Series, 44 (13), 1645-1658.

Jacobsen, D. H., & Bjorn, N. E. (2005). What Drives House Prices? Economic Bulletin, 76(1), 29-
41.

Andrews, D. (2010) “Real House Prices in OECD Countries: The Role of Demand Shocks and
Structural and Policy Factors, OECD Economics Department Working Papers, No. 831, OECD
Publishing.

Follain, J.R. (1981) “Does Inflation Affect Real Behavior? The Case of Housing”, Southern
Economic Journal, 48, 570-82
Grum, B. and Govekar, D.K., 2016. Influence of macroeconomic factors on prices of real estate in
various cultural environments: Case of Slovenia, Greece, France, Poland and Norway. Procedia
Economics and Finance, 39, pp.597-604
Tripathi, S., 2019. Macroeconomic determinants of housing prices: a cross country level analysis

Renigier-Biłozor, M. and Wiśniewski, R., 2012. The impact of macroeconomic factors on

residential property prices indices in Europe. Aestimum, pp.149-166
KARAGÖZ, K. and ÖZKUBAT, G., 2021. Impact of macroeconomic factors on housing prices:
an analysis for Aegean region. Yaşar Üniversitesi E-Dergisi, 16(62), pp.867-889
Li, J., 2020, November. The effects of macroeconomic factors on housing prices in China:
Empirical research and linear regression analysis. In 2020 2nd International Conference on
Economic Management and Cultural Industry (ICEMCI 2020) (pp. 471-474). Atlantis Press.
Narvada, G.R., 2022. An analysis of residential land prices and fundamentals in Mauritius. The
Business & Management Review, 13(1), pp.59-68

Vella, L., 2018. The macro economic factors affecting property prices in Malta. MCAST Journal
of Applied Research & Practice, 2(1), pp.4-27

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D Trofimov, I., Md Aris, N. and CD Xuan, D., 2018. Macroeconomic and demographic
determinants of residential property prices in Malaysia. Zagreb International Review of Economics
& Business, 21(2), pp.71-96.
San Ong, T., 2013. Factors affecting the price of housing in Malaysia. J. Emerg. Issues Econ.
Financ. Bank, 1, pp.414-429

Akumu, D.O., 2014. The relationship between selected macro economic variables and residential
housing property returns in Kenya (Doctoral dissertation, University of Nairobi).

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 Gantt Chart
28-Nov-23 18-Dec-23 07-Jan-24 27-Jan-24 16-Feb-24 07-Mar-24 27-Mar-24 16-Apr-24

Collect Research papers

Introduction
Literature Review + Research Design
Collection of Data
Conduct statistical tests on eviews
Analysis of Data
Hypothesis testing
Analyze for possible limitations
Give Conclusion
Final Revision, editing & Printing

Final Conduct Literature

Analyze for Collect
Revision, Give Hypothesis Analysis of statistical Collection Review + Introductio
possible Research
editing & Conclusion testing Data tests on of Data Research n
limitations papers
Printing eviews Design
Start Date 15-Mar-24 04-Mar-24 28-Feb-24 20-Feb-24 15-Feb-24 11-Feb-24 10-Jan-24 23-Dec-23 15-Dec-23 28-Nov-23
Days to complete 21 4 2 6 4 3 30 15 7 15

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