Open AccessInternational Real Estate Review
Author(s) -
William Miles
Publication year - 2016
Publication title -
journal of the asian real estate society
Language(s) - English
Resource type - Journals
ISSN - 1029-6131
DOI - 10.53383/100225
Subject(s) - real estate , diversification (marketing strategy) , economics , monetary economics , financial economics , real estate investment trust , great recession , financial crisis , herding , business , finance , macroeconomics , geography , marketing , keynesian economics , forestry
UK home prices often exhibit only moderate (and sometimes barely positive) correlation across different regions. This reflects segmentation in the national housing market and also provides an apparent opportunity for lenders and investors to diversify their exposure to regional downturns, for instance, by creating residential mortgage backed securities out of geographically dispersed home loans. Unfortunately, in a crisis, correlations may rise, and the benefits from geographical diversification may disappear just when investors desire them the most. By using a flexible generalized autoregressive conditional heteroskedasticity technique, we find that regional correlations indeed rose dramatically during the latest downturn, in some cases, to unprecedented levels. Moreover, this increase in co-movement was clearly financial contagion, and not merely interdependence. Lenders, as well as investors in mortgage-backed and other housing securities should thus not rely on house price correlations calculated during ¡§normal¡¨ times.