Spacial Dependence in the Residential Canadian Housing Market

Journal of Real Estate Finance and Economics, February 2019, Volume 58, Issue 2

Posted: 9 May 2019

See all articles by Yuan Zhang

Yuan Zhang

University of Guelph

Yiguo Sun

University of Guelph

Thanasis Stengos

University of Guelph - Department of Economics

Date Written: February 2019

Abstract

This paper studies the spatial dependence of residential resale housing returns in ten major Canadian Census Metropolitan areas (or CMAs) from 1992Q4 to 2012Q4 and makes the following methodological contributions. Firstly, in the context of a spatial dynamic panel data model we use grid search to derive the appropriate spatial weight matrix W among different possible specifications. We select the compound W with the minimum root mean squared error formed from geographical distances and the ten CMAs' gross domestic product. Secondly, contrary to common practice in the literature, we decompose the impacts of explanatory variables into direct and indirect impacts and proceed to derive and plot the impulse response functions of housing returns to external shocks. The empirical results suggest that Canadian residential housing markets exhibit statistically significant spatial dependence and spatial autocorrelation and that both geographical distances and economic closeness are the dominant channels of spatial interaction. Furthermore, the special feature of the Canadian housing market is that the responses to the shocks do not spread widely across regions and that they fade fast over time.

Keywords: Canadian residential resale housing returns; Impulse response functions; Spatial dependence; Spatial dynamic panel data models; Spatial weight matrix

Suggested Citation

Zhang, Yuan and Sun, Yiguo and Stengos, Thanasis, Spacial Dependence in the Residential Canadian Housing Market (February 2019). Journal of Real Estate Finance and Economics, February 2019, Volume 58, Issue 2, Available at SSRN: https://ssrn.com/abstract=3374458

Yuan Zhang

University of Guelph ( email )

Guelph, Ontario
Canada

Yiguo Sun

University of Guelph ( email )

Guelph, Ontario
Canada

Thanasis Stengos (Contact Author)

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

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