Who Influences the Asian–Pacific Real Estate Markets: The US, Japan or China?

• Author: Yuting Huang,Kim Hiang Liow,Jeongseop Song
• DOI: http://doi.org/10.1111/cwe.12306
• Published date: 01 November 2019
• Date: 01 November 2019

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 50–78, Vol. 27, No. 6, 2019

50

Who Inuences the Asian–Pacic Real Estate

Markets: The US, Japan or China?

Kim Hiang Liow, Yuting Huang, Jeongseop Song*

Abstract

As rapid economic growth in China has led to significant appreciation of urban real

estate market values, this study examines China’s inuence on Asian–Pacic real estate

markets by focusing on their respective market integration with the US, Japan and China

during the period January 2005 to December 2017. Market integration is examined by

unconditional and time-varying conditional correlations, nonlinear Granger causality

and dynamic connectedness effects. Overall, although the US and Japanese real estate

markets have signicantly inuenced return and volatility in the regional markets, China

has emerged as another major regional real estate volatility leader with rising inuence

over volatility integration, especially during the 2007–2011 crisis period. Financial

crises have strengthened China’s volatility connectedness effects and market integration

with other Asian–Pacific real estate markets. Our results imply that the benefits of

regional portfolio diversication may be declining as volatility integration across the

Chinese and Asian–Pacic real estate markets becomes stronger. Therefore, diversied

global investors should pay greater attention to these real estate markets.

Key words: Asian–Pacic orthogonal real estate markets, correlation, dynamic connectedness,

market integration, nonlinear causality

JEL codes: F36, G15

I. Introduction

Over the past two decades, China (CH)1 has emerged as a growth player in the world,

especially in the areas of trade and investment. CH’s economy has now passed Japan

(JP) to become the second largest global economy. This increasing influence of CH

over regional and world economies has attracted considerable attention given the

*Kim Hiang Liow (corresponding author), Professor, Department of Real Estate, National University of

Singapore, Singapore. Email: rstlkh@nus.edu.sg; Yuting Huang, Assistant Professor, International School of

Economics and Management, Capital University of Economics and Business, China. Email: huangyuting0@

gmail.com; Jeongseop Song, PhD Candidate, Department of Real Estate, National University of Singapore,

Singapore. Email: jssong0711@gmail.com.

1China in this paper refers to the Chinese mainland.

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Asian–Pacic Real Estate Markets 51

country’s remarkable economic development, as well as the close spatial and economic

connection among countries. The Asian–Pacic (APAC) stock markets have provided

relatively high risk-adjusted returns compared to their regional counterparts (Donadelli,

2015), and individually, the stock markets within APAC have also outperformed the

US and other developed stock markets in their risk premiums (Donadellli and Prosperi,

2012; Donadelli and Persha, 2014). Consequently, an increasing number of studies have

examined the market integration of the CH stock market with regional or global stock

markets. Together with the US and JP, one of the focuses of these studies was to evaluate

the stock market linkages between CH and Asian economies, as well as how these

linkages have shifted during and after the 1997–1998 Asian nancial crisis (AFC) and

the 2008–2009 global nancial crisis (GFC). These studies include Ng (2000), Burdekin

and Siklos (2012), Zhou et al. (2012), Glick and Hutchinson (2013), Tam (2014), Chien

et al. (2015) and Pu and Dong (2017). Although not fully consistent, the ndings from

these studies imply that the CH stock market has increasing inuence over the US and

JP stock markets across the APAC region in return correlation, volatility spillover effects

and market integration, especially during crises. For example, using dynamic conditional

correlation analysis, Burdekin and Siklos (2012) found rising return comovement among

the APAC markets over time that accelerated at the beginning of the 2007 GFC. Their

additional results indicate that the Shanghai stock market has experienced an increasing

level of integration with other regional and world markets since the 2000’s despite the

capital controls imposed by the Chinese government.

Along with CH, the US is an important trading partner of many APAC countries.

Traditionally, the US stock market comoved strongly with the APAC stock markets.

Increased attention has been focused on the effects of the US stock market on the

individual APAC economies following documented results of the leading role of the

US market in the international stock market (Eun and Shim, 1989; Bessler and Yang,

2003). Ng (2000) and Nam et al. (2008) found that after the 1997–1998 AFC, emerging

Asian countries have been increasingly subject to US stock market influence. The

third potential source of information flow for the APAC stock markets is JP because

of its close economic linkages and geographical proximity to other economies in the

region. Cha and Oh (2000) and Kim (2005), among others, found that the inuence and

connectedness effects of the JP stock market with the APAC stock markets was limited

until the 1997 AFC.

Real estate is an important asset class in the US, CH, JP and many APAC

economies. Moreover, many APAC countries are characterized by high population

density, massive urbanization growth, lower yield and relatively high real estate values.

Consequently, APAC real estate markets are generally aggressive with higher total risks