The impact of economic policy uncertainty on American Real Estate markets : empirical evidence from quantile regression analysis

Abstract

Economic Policy Uncertainty is a risk that emerges from the ambiguity of government plans and project progresses, which leads to delaying investments and monetary circulation in a certain market. In this research paper, we are interested is studying whether Economic Policy Uncertainty has an impact on the real estate market. Similar to other markets, risk is the most important determinant of investment in real estate, especially this market is sensitive to uncertainty as it involves durable assets in which the investment is reversible at a high cost. We have focused our study on the US market, and used the EPU index as a measure of uncertainty. In parallel, to measure the real estate market behavior, we have selected eight major US Real Estate Investment Trusts ETFs. The methodology adopted consists of the quantile regression, through which we have regressed the returns on each of real estate funds on the Economic Policy Uncertainty Index, covering the period between November 12, 2007 and February 28, 2019. Our results delivered consistent observations. First, for most of the regressions, the impact of the Economic Policy Uncertainty index on the REIT ETFs was positive, which means that a higher degree of economic uncertainty in the country would result in an increase of the returns on the real estate funds. Second, we consistently find that the response of the REIT funds to EPU is significant at the upper and lower percentiles of the regressions, whereas the returns are not responsive around the median, which suggests that average fluctuations in returns of the Real Estate Investment Trust funds in the United States are not primarily impacted by uncertainties in the economy, however the EPU has an impact in predicting return values in extreme cases where returns on real estate funds witness exceptional increases or decreases.