A non-systematic factor awakens : the role of sentiment in the housing market

Abstract

Cities enjoy great progress in urban development until development hits a bottleneck. As various problems emerge in the progress, modern society appeals to a more harmonic development so as to reach a sustainable balance among three aspects: namely, society, economy and environment. Sustainable development is an important issue in enabling and balancing urban transformation in and through cities. Among those three aspects, the well-being of an economy is in the leading position as economic activities determine allocation of resources into the other two aspects, i.e. society and environment. A number of studies show that the basic and effective way to facilitate sustainable development is to attain the stability in economic growth. As property development makes up a large portion of urban development and housing markets take the majority of property markets, the housing market plays a prominent role in urban development and economic growth. Growing efforts are put into examining the critical factors that affect the stability of housing markets and investigating the market anomalies that disturb the stability. Most of these studies focus on systematic factors and some of them explore the puzzles that classical theories are less able to accurately explain. These puzzles give rise to newly developed theories that turn to the effects of non-systematic risk. These new theories attempt to help classical models in enhancing elucidative power for yet-to-explain phenomena, based on some new notions and assumptions. One of these new notions is sentiment, which is derived from psychology theory. The new assumption related to this notion indicates that participants in a certain market are subject to sentiment (DeLong et al., 1990), which is defined as investor's belief to market future trend. Evidence suggests that the property market is always affected by sentiment. As the extant studies lack a comprehensive understanding of effects of sentiment in the housing market, this PhD study aims to address this issue. In line with this comprehensive goal, four specific research objectives have been undertaken in four chapters respectively to conduct a holistic investigation of the different roles of sentiment in the housing market. Two studies conducted in Chapters 2 and 3 examined the role of sentiment at micro level in housing markets. More specifically, the first study explored effects of sentiment in optimal development for residential developers and the second investigated effects of sentiment in optimal housing consumption for households over the life-cycle. The other two chapters (Chapters 4 and 5) examined the macro effects of sentiment on the movement of housing markets. A new index developed in Chapter 3 was designed to measure changes in market sentiment for the housing market. Such an index based on trading intensity is able to capture changes in market sentiment more accurately and directly. Chapter 4 identified the short-term predictability of sentiment and gauged the long-term effect of sentiment, as well as verified the different roles of sentiment in sales and rental sectors, in the housing market. This thesis has offered both theoretical and practical contributions. It bridges the knowledge gap due to the limited work in non-systematic risk in the housing market. In addition, this study sheds light on how the roles of sentiment differ at both micro and macro levels. The participants on both sides of housing markets could benefit from the implications of this study, as follows. An optimal dynamic model associated with sentiment factors was developed to offer developers a more accurate approach to evaluating their proposed projects. This new model for project evaluation could assist developers in making optimal choices when facing the uncertainties of market fundamentals and sentiment. A life-cycle model was developed to explore the role of sentiment in households' housing choices including optimal tenure choice and housing demand. The model's implications gave an in-depth insight into how these choices changes with sentiment in housing markets. On the other hand, a sentiment index was introduced to measure sentiment at macro level more precisely. Not only does the index provide a better understanding of the pricing of real estate as an asset, but also it benefits further macro studies on the dynamics of housing markets. This sentiment-index study provides important policy implications in two respects: that is (1) short-term predictability and (2) long-term effect of sentiment in housing markets. They can serve as references which benefit the relevant authorities, should they make policies to stabilize and improve the functioning of housing markets.