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
Date Written: February 2019
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
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