Foreign liquidity to real estate market: Ripple effect and housing price dynamics

Abstract

Globalisation enables foreign liquidity to access local property markets. This paper depicts a strong connection between foreigners’ property acquisitions and regional housing price movements in Singapore. Testing structure breaks also illustrates a ripple effect of prices from the central city to suburbs. A structural vector autoregression incorporates these two observations. Impulse-response function and forecast-error variance decomposition show that central region’s foreign-liquidity shocks can greatly impact housing price growth in not only the central region but also the non-central region where foreign buyers are inactive. The ripple effect of prices plays an important role. Non-central region’s foreign-liquidity shocks, in contrast, have small effects on both regions. Impacts of foreign-liquidity shocks can reach the public-housing market, where foreigners’ participation is prohibited. The findings are useful to policy makers who consider regulations of foreign home buyers as an instrument to stabilise housing markets.