1. An empirical study of efficiency of the Austrian residential markets Shanaka Herath, Gunther Maier Research Institute for Spatial and Real Estate Economics The 18th Annual Conference of the European Real Estate Society 17th June 2011 The Eindhoven University of Technology

2. ERES 2011. EindhovenPage 2 Outline of the presentation  Introduction  The conceptual framework  Literature on efficient markets (from finance to real estate)  Our study  Data  Methodology  Empirical results  Conclusion

3. ERES 2011. EindhovenPage 3 Introduction  Maier et al. (2010) – “energy efficient improvements in residential properties were not capitalized into prices”  suggests that Austrian residential markets are not efficient  Purpose  Formally testing the informational efficiency of the Austrian residential markets  Why is it important?  House price models assume informationally efficient markets  Provide opportunities for arbitrage  This is not operational/ allocative efficiency  Deviation of real estate prices from fundamental value

4. ERES 2011. EindhovenPage 4 The conceptual framework: What is an Efficient Market?  “Efficient market hypothesis” (EMH) (Fama et al., 1969) about financial markets: “The prices of traded assets already include/reveal all known information“  Implication: “random walk hypothesis”  as long as fundamentals do not change, fluctuations are random  follow a random walk

5. ERES 2011. EindhovenPage 5 Market efficiency research  Originally on financial markets  Early research on market efficiency (Samuelson 1965, Fama et al. 1969, Fama 1970)  A market is efficient when it “adjusts rapidly to new information” (Fama et al. 1969)  An efficient market is one where prices “fully reflect all available information” (Fama 1991)  EMH in financial markets  Early decade: “no other proposition in economics which has more solid empirical evidence supporting it” (Jensen 1978)  Today: EMH appears more controversial (Beechey et al. 2000)

6. ERES 2011. EindhovenPage 6 Market efficiency research (contd.)  Market efficiency depends on a specific information set (not an absolute characteristic)  Efficiency with respect to some set of information  Three forms of market efficiency  Weak information set consists of only past prices  Semi-strong information set consists of past prices and all publicly available information  Strong information set also includes non-public information

7. ERES 2011. EindhovenPage 7 Real estate market efficiency  Later, extended to the real estate market (Gatzlaff & Tirtiroglu 1995, Cho 1996, Maier & Herath 2009)  First efficiency tests of the real estate market (Gau 1984, 1985, Linnemann 1986)  Real estate market efficiency Theoretical argument Empirical argument Test specific versions of the efficient market hypothesis (EMH) characteristics of the real estate market

8. ERES 2011. EindhovenPage 8 The empirical study  Test specific versions of the efficient market hypothesis (EMH)  Weak form and semi-strong form of EMH  On Viennese and Austrian residential markets  Research question: “Whether the Austrian residential markets are informationally efficient?”

9. ERES 2011. EindhovenPage 9 Methodology  Examine the autoregressive structure of the house price series  Check for stationarity  Determine appropriate order of the autoregression (based on BIC and AIC)  Check each process for white noise residuals  Form of the final regression utilized/ length of the autoregressive lag structure provide insights about efficiency  Price changes from many lags explain current price changes -> failure of the market to absorb information

10. ERES 2011. EindhovenPage 10 Data  Weak form of the EMH  Austrian National Bank  Residential real estate price indices (annual and quarterly)  The price index uses hedonic approach, with the district as a location variable and various variables describing the object (year of construction, stat of repairs, amenities,..)  Semi-strong form of the EMH  Austrian National Bank  Austrian Stock Exchange Prices [AUSTRIAN TRADED INDEX (ATX)] - 1999=100  Other fundamental economic indicators

11. ERES 2011. EindhovenPage 11 Empirical results Annual price index and appreciation- Vienna and Austria

12. ERES 2011. EindhovenPage 12 Empirical results (contd.) Quarterly price index – Vienna and Austria

13. ERES 2011. EindhovenPage 13 Empirical results (contd.) Weak form test  Autocorrelation in annual log prices and log returns  Substantial autocorrelation in quarterly log prices and log returns  Is it a consequence of seasonality?  Analysis using a specific quarter of every year  Maximum significant lag length is 2  Weak-form efficient Table 1 Lag structure estimates Number of lags with autocorrelation log of pricelog returns (appreciation) Annual Vienna21 Austria (outside Vienna)10 Quarterly Vienna45 Austria (outside Vienna)21 Quarterly- Q1 Vienna21 Austria (outside Vienna)10 Quarterly- Q2 Vienna21 Austria (outside Vienna)21 Quarterly- Q3 Vienna10 Austria (outside Vienna)10 Quarterly- Q4 Vienna00 Austria (outside Vienna)10

14. ERES 2011. EindhovenPage 14 Empirical results (contd.) Semi-strong form test  Literature on semi-strong form version of EMH  Macroeconomic fundamentals/ economic indicators (Gatzlaff, 1994)  Movements of stock prices (Gyourko and Keim, 1992)  Industry/firm related public announcements (Gyamfi- Yeboah et al (2011)  Can the Austrian Stock Index (ATX) and past house prices predict present prices?

15. ERES 2011. EindhovenPage 15 Empirical results (contd.) Semi-strong form test Residuals are white noise! Semi-strong version of the EMH rejected!

16. ERES 2011. EindhovenPage 16 Conclusions  Austrian residential markets are weak-form efficient  Viennese residential market is inefficient in the semi-strong form  Nature of the real estate market  Transaction level prices are not publicly available  Way forward:  An answer to critics on using index values (use Geltner (1993) method to unsmooth price index values)  examine semi-strong from version of the EMH using public information on market fundamentals or economic indicators

17. FUßZEILESEITE 17 Thank you for your attention! VIENNA UNIVERSITY OF ECONOMICS AND BUSINESS Augasse 2-6, 1090 Vienna, Austria www.wu.ac.at SPATIAL AND REAL ESTATE ECONOMICS RESEARCH INSTITUTE Nordbergstraße 15 (UZA4, Kern B, 4. Stock) A-1090 Vienna, Austria http://www.wu.ac.at/immobilienwirtschaft SHANAKA HERATH PROF. GUNTHER MAIER T +43-1-31336-5764 T +43-1-31336-4780 F +43-(0)1-31336 705 Shanaka.herath@wu.ac.atgunther.maier@wu.ac.at