Spatial Dependence in the Residential Canadian Housing Market
This paper studies the spatial dependence of residential resale housing returns in ten major Canadian Census Metropolitan areas (or CMAs) from 1992Q4 to 2012Q4 and makes the following methodological contributions. Firstly, in the context of a spatial dynamic panel data model we use grid search to derive the appropriate spatial weight matrix W among different possible specifications. We select the compound W with the minimum root mean squared error formed from geographical distances and the ten CMAs’ gross domestic product. Secondly, contrary to common practice in the literature, we decompose the impacts of explanatory variables into direct and indirect impacts and proceed to derive and plot the impulse response functions of housing returns to external shocks. The empirical results suggest that Canadian residential housing markets exhibit statistically significant spatial dependence and spatial autocorrelation and that both geographical distances and economic closeness are the dominant channels of spatial interaction. Furthermore, the special feature of the Canadian housing market is that the responses to the shocks do not spread widely across regions and that they fade fast over time.
KeywordsCanadian residential resale housing returns Impulse response functions Spatial dependence Spatial dynamic panel data models Spatial weight matrix
This paper is part of the Ph.D. thesis of the first author. It has been presented at the 2nd Annual Doctoral Workshop in Applied Econometrics, the 41th Annual Conference of the Eastern Economics Association, and the 49th Annual Conference of the Canadian Economics Association. We wish to thank an anonymous referee for very useful comments that helped with interpretation of our results. We also want to thank Dr. Martin Burda, Xuefeng Pan, Dr. Christos Ntantamis and participants in the conferences, for their helpful comments on earlier drafts of this paper. We wish also thank Dr. Paul Anglin and Dr. Min Seong Kim for their valuable comments. The second author would like to thank for the financial support from the Social Science and Humanities Research Council of Canada Insightful Grant 435-2016-0340.
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