Real Estate Prices and Capital Markets Liquidity

The financial crisis highlighted the important role played by liquidity in finance and real estate markets. For example, Scholz et al., (2015) find that asset liquidity is a relevant pricing factor which contributes to explaining return variations in real estate equity markets. At a macroeconomic level, the securitization of real estate equity and debt through the global capital markets means that property is now, more than ever, interconnected with other investment classes available globally. The contagion from the US sub-prime single family residential mortgage sector that engulfed the capital markets around the world has had a material negative impact upon the commercial real estate markets at a time when market fundamentals were solid.

In the UK, financial deregulation permitted more liquidity into real estate markets, reducing credit rationing. For example, housing finance in the UK originates from a combination of sources, predominantly from retail deposits, securitisation and wholesale funds (CML, 2011). However, while credit rationing may be reduced, exposure of the financial system to liquidity from mortgage-backed securities products (securitisation) was acutely felt by Northern Rock that was a precursor to the subsequent collapse of liquidity and the debt market in 2008 and 2009. Monetary policy also played its part. A wealth of recent literature (Mishkin, 2007, Muellbauer, 2008, Iacoviello, 2005) indicates that increases in mortgage credit resulting from monetary policy fuelled housing demand and increased house prices (Bernanke, 2010). The procyclicality of debt funded property purchases and the collapse in capital values indicates the importance of liquidity in real estate markets, residential and commercial as well as correlations between value and transactions volumes.

This study will aim to investigate the role of liquidity in real estate markets, identifying the transmission channels to real estate values, interactions with the macroeconomy, financial innovation and policy change.
While earlier research has attempted to understand, what liquidity means in a real estate context, this research will follow finance analysis and apply novel econometric analysis techniques to provide an accurate picture of the role of liquidity in its different forms in the real estate sector, nationally and internationally. Further, as real estate has matured as an investment asset class, a variety of new investment products exist in real estate that align it more closely with other financial assets and open up real estate as an investment destination. Earlier studies were limited by data availability but there is now more data available to enable more detailed original research. The topic remains of potential policy importance given the role of real estate in household wealth positions and as a source of long term income for pension funds.

The successful PhD student will undertake a thorough literature review analysing the sources and role of liquidity in real estate markets. This will help to identify the appropriate methodology for subsequent analysis. The analysis will be quantitative econometric analysis of real estate and economic data. It will apply advanced analysis techniques that have not previously been used in real estate research. In addition, the project will address an under-researched area namely the sources and role of liquidity, its impact on asset prices, and the increased interaction between macroeconomic forces and real estate development and values. The successful PhD candidate will be able to display an understanding of econometric analysis and be interested to develop this further applying advanced techniques during the period of PhD study.