Towards Understanding the Volatility of Housing Prices and Exploring the Tourism Demand Impact

Abstract

Using an Exponential Generalized Autoregressive Conditional Heteroskedasticity model (EGARCH), the volatile nature of residential property prices in New Zealand is examined. The model investigates the extent to which macroeconomic fundamentals and a combined population shift/visitor factor called "tourism" impact residential property values and capture variations in volatility across different regions. We find that fundamentals have different impacts across regional property markets. In line with the literature, the bigger metropolitan regions like Auckland and Christchurch are more sensitive to macroeconomic factors than smaller regions. Additionally, we find house price volatility in southern regions is affected by macroeconomic fluctuations more than northern areas. Novel to the literature, we discover that "tourism" has significant impact on house price volatility as well, particularly in popular touristic areas. These results imply that to better understand the determinants of house price volatility and mitigate its effects, policy makers should consider a coordinated approach, taking a regional perspective and the interaction of several variables into account.