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Charles University in Prague

Empirical Project Assignment

Residential property prices in the period 1995 – 2011 in Russia

Kseniya Bortnikova
Valeriu Covalenco
Olesia Kiiashko

We analyzed the changes in residential property prices in Russian market during the years 19952011 and tried to investigate the roles of such factors as disposable income, rates of inflation,
growth of the value of the money supply in economy and exchange rate in these changes. Using
our data and econometric framework (OLS and 2SLS) we confirmed our assumptions, except the
assumption, that the growth of the value of money supply in economy leads to growth of real
estate price.

it makes house markets a central element in the analysis of trends in aggregate expenditure. al. that this research doesn’t concern the latest changes in Russian market of residential property arising from the crisis situation. Section 4 provides conclusions.1. (2014). House prices are also can be useful for analysts. whether the high rates of inflation leads to increase in cost of construction that causes increase in cost of ready real estate. Section 3 contains the main methodological problems. 2007). Introduction The large movements in residential property prices in Russian market observed over the past decade have raised interest in housing market developments. al. al. policymakers and households share an interest in property price developments. with more extensive geographical and time coverage. such as the prices of financial assets (Zollino et. and their propensity to spend. the strength of bank balance sheets and the interactions of macroeconomic and financial stability. and there were crucial innovations in mortgage loan markets. This research is based on the fact that the signaling function of property prices can influence the behavior of monetary policy. The importance of residential property price is very high in macroeconomic and financial stability analysis. in relation both to the possible effects on current rentals (included in the price indexes) and expectations about future prices.. The rest of the paper is organized as follows. 2008). Literature review It is no surprising that house prices are a frequent topic nowadays. F. Yiu et. Scatigna et. whether the growth of the value of money supply in economy leads to growth of purchasing power and so to growth of real estate price. Since the 1990s the housing market has taken on increasing importance in the academic debate and in discussions on monetary policy objectives. As the residential property price indicators had a rising tendency during years 1995-2011. Pricing factors are understood as set of various variables which influence level. (2008) presented a new indicator of house prices in Italy. define a tendency of their behavior. Overall. Appendix section provides all estimations results. that allows to expect increasing of demand in the regional market of real estate. who compile macroeconomic series on households’ wealth or consumer price indices. whether exchange rate has important effect on real estate price. therefore. From the householder’s point of view this research can be useful to determine the risks of investment in real estate. al. Zollino et. al. recalls the main data sources and empirical results. House prices contain significant information for the purposes of assessing inflationary pressures. That is why statisticians. (2013) in their study uses a newly . it becomes vital to improve the quality of indexes to enable housing market trends to be monitored reliably and promptly (Mishkin. (2014) emphasizes that fluctuation in house prices have a large impact on households' net wealth. Purposed research investigates whether disposable income plays pivot role to describe the large movements in residential property prices. For household buying a house is usually the largest single transaction and its largest asset. structure and dynamics of the prices. The importance of residential property price is very high in analysis of macroeconomic and financial stability risks as well as to research into the interactions of the real and financial sectors. Section 2 sums up the literature review. But it’s very crucial to mention. According to the paper by Scatigna et. 2.

Allen et. We examine the underlying factors that determine the residential property prices with OLS and 2SLS. in the first quarter of 2009 there was a tendency to decreasing. Putin and so on. GDP and dollar exchange rate to ruble. This period in Russia was full of different political and economic events that seriously affected the change in residential real estate prices. Using this framework. Data Data set was collected mainly from official website of Federal State Statistics Service of the Russian Federation. Per capita income. Beginning in 1991. (Intesco Research Group.V. money supply. presidential elections of V.developed bubble detection method (Phillips. GDP and Exchange rate (Table 1 in appendix). This project is based on data coming from year 1995 to 2011. The sale of housing has resulted in a redistribution of housing and change in ownership patterns. . 2004). The housing market in Russia in post-Soviet Union period has shifted from one in which the government produced most housing units to one in which the private market produces most of units. Methodology and Data 3. (2) whether the high rates of inflation leads to increase in cost of construction that causes increase in cost of ready real estate. Price of oil. Population size. the resignation of President Yeltsin in 1999.1. Methodology and Results We present our data and econometric framework in this section. inflation. our ambition is to investigate: (1) whether disposable income plays pivot role to describe the large movements in residential property prices. 3.2. dollar rate and so on. the global economic crisis in 2009. 1999). With the shift to private ownership. Rate of Inflation. However. (4) whether exchange rate has important effect on real estate price. First we estimated the following model using OLS: 𝑌𝑡 = 𝛽0 + 𝛽1 ∗ 𝑥2𝑡 + 𝛽2 ∗ 𝑥4𝑡 + 𝛽3 ∗ 𝑥5𝑡 + 𝛽4 ∗ 𝑥6𝑡 + 𝛽7 ∗ 𝑥7𝑡 + 𝑢𝑡 . The most important of them are: the Russian monetary reform and the economic crisis in 1998 (what also provoked a sharp drop in the ruble exchange rate from 6 to 21 rubles per dollar). 2013) This research is focused on describing relationship between residential property prices in Russia and exogenous economic factors. such as income (per capita). In our analysis we use OLS and 2SLS models for estimation of linear dependences between the unknown parameters. Money supply. al. High inflation and little new construction have led to a significant rise in the price of housing. 2011) to identify real estate bubbles in the Hong Kong residential property market. In 2007-2008 there was a gradual increase in the dynamics of average prices for apartments of all types by quarters. rate of inflation. in some instance for a fee (but after 1992. and Yu. 3. The index stagnation was recorded during 2010. (3) whether the growth of the value of money supply in economy leads to growth of purchasing power and so to growth of real estate price. local governments could transfer title of state-owned dwellings to their tenants. A positive dynamics appeared in the second quarter of 2011. a private housing market has emerged in Russia (Andrew T. for free) and the general population was allowed to engage in rental and sales transactions (Kaganova. Shi. Our data consists of eight variables: Price on housing market.

005 0.546 per capita income rate Estimate Std.168 .per capita income x4𝑡 . 0.where 𝑥2𝑡 .05 ‘. p-value: 2.039 money supply -0. it just produces large SE for our estimated coefficients. where 𝑥2𝑡 . exchange rate -0. Error (Intercept) 0.02 on 5 and 11 DF.001 ** GDP rate 0.per capita income x4𝑡 .001 ‘**’ 0.961 F-statisic: 80. Detailed results can be found in the Table 2 of the Appendix.001 0.038 money supply -0. Also.004 0.001 0.987 3.337 Signif.GDP rate We test the restricted model and obtain the following results: Estimate Std.164 per capita income 2.001 Signif.1 ‘ ’ 1 Residual standard error: 3.973 Adjusted R-squared: 0.734 0.001 . We will try to solve this problem by dropping variable ex_r: 𝑌𝑡 = 𝛽0 + 𝛽1 ∗ 𝑥2𝑡 + 𝛽2 ∗ 𝑥4𝑡 + 𝛽3 ∗ 𝑥5𝑡 + 𝛽4 ∗ 𝑥6𝑡 + 𝑢𝑡 .codes ** * .793 inflation rate 0.inflation rate x5𝑡 -money supply x6𝑡 .002 0.319 3.688 on 11 degrees of freedom Multiple R-squared:0. After checking for correlation we find strong multicollinearity between variables Income per capita and Money supply and GDP.inflation rate x5𝑡 -money supply x6𝑡 .001 GDP rate 0.035 0. Currency exchange rate variable is correlated with all the variables in the model.888 inflation rate 0.’ 0. As we already know multicollinearity does not bias our results. Error (Intercept) -3.82e-08 Signif.01 ‘*’ 0.755 0 ‘***’ 0. Money Supply is strongly correlated with ** We see that only two variables are significant at a 5% confidence level.GDP rate x7𝑡 .

We still have high standard errors for our estimated coefficients. and also we assumed.Signif. the price of real estate will increase by 2.16 on 4 and 12 DF.05 ‘.001 *** GDP rate 0.337 0.01 ‘*’ 0.001 0. if it will go up by 1 unit (thousands rubles/month).734 0.001 ‘**’ 0. then price of estate grows too. Therefore. This method allows us to correct the effect of correlation in the error terms.02104 * Signif.005 0.1 ‘ ’ 1 Residual standard error: 4..9635 Adjusted R-squared: 0.599 per capita income 2.001 ‘**’ 0.’ 0.1 ‘ ’ 1 As a result we have t-stat( =1) < critical value (chisq).987 1.271 2 7 0 ‘***’ 0. which implies that if money supply increases.3233 0.1 ‘ ’ 1 As a result we have all the variables significant. We expected a positive sign of the coefficient for this variable.009 money supply -0. . except Inflation rate.13 on 12 degrees of freedom Multiple R-squared: 0. In the case of Income per capita.001 ‘**’ 0.987 thousand rubles per square meter.117 ** *** Signif. We use Newey–West estimator to test the coefficients of our initial (Intercept) 0.’ 0. Moreover. that when income per capita grows. we cannot say that Model 1 (restricted) is more adequate than Model 2 (original model). Likelihood ratio test Model 1: h_price ~ y_percap + Infl + Money + GDP Model 2: h_price ~ y_percap + Infl + Money + GDP + ex_r #Df LogLik Df Chisq Pr(>Chisq) 1 6 -45. estimated parameters are less significant.9513 F-statisic: 79. It seems to be logical according to economic theory. codes: 0 ‘***’ 0. This leads us to believe that we might have bias in our estimators. Error Signif. ceteris paribus. Coefficient of our intercept suggests us that the average value of Prices in the Housing market in Russia is 0. The Money Supply parameter is equal to – 0.01 ‘*’ 0.001 *** exchange rate -0. We use Likelihood test to see if our restricted model is better.01 ‘*’ 0.607e-08 Our results did not improve by dropping a variable.003.003 0. Z test of coefficients: Estimate Std.003 units (thousands rubles/square meter). ceteris paribus.734 units (thousand rubles/square meter).codes: 0 ‘***’ 0. the price of real estate will decrease by – 0. It means that if the money supply will increase by 1 unit (billion).05 ‘.443 inflation rate 0.’ 0. that price will also increase. OLS1. which means that we do not reject the null hypothesis. p-value: 1.609 1 5.05 ‘.

001 0.77316e-14 ) Infl : F( 7 .exchange rate 𝑌𝑡 . Our model is: Y𝑡 = α0 + α1 ∗ 𝑥2𝑡 + α2 ∗ x4𝑡 + α3 ∗ x5𝑡 + α4 ∗ x6𝑡 + α7 ∗ x7𝑡 + u𝑡 where: x2𝑡 = γ0 + γ1 ∗ 𝑌𝑡 + γ2 ∗ x1𝑡 + γ3 ∗ x4𝑡 + γ4 ∗ x5𝑡 + γ5 ∗ x6𝑡 + γ6 ∗ x7𝑡 + u𝑡 where 𝑥2𝑡 . the model is not specified correctly. This can be because of the insignificant coefficients on the instruments in the first stage and the large standard errors for 2SLS estimators. thus the estimates are not valid.892 0.housing market price x1𝑡 – oil price We obtained the following results: Estimate Std. 10 ) = 1291.268 0.001 0.004 inflation rate 0. As we can see from the J-test.174 0.505173e+32 (P-Vavue = 0 ) GDP : F( 7 .069671e+34 (P-Vavue = 0 ) ex_r : F( 7 .045955e+32 (P-Vavue = 0 ) Money : F( 7 .039 0.801 3.per capita income x4𝑡 .336 First stage F-statistics: y_percap : F( 7 . Error Pr(>|t|) (Intercept) -0. Next step in our project is 2SLS regression.125 Test E(g)=0: J-test P-value 4.678 money supply -0. 10 ) = 3.828 per capita income 2.357 0.003 0. We check our models using Hausman test to see if there is any misspecification. 10 ) = 1.695 0. the moment conditions do not hold i.001 ex_r -0.GDP rate x7𝑡 .001 GDP rate 0.044 exchange rate -0.189 0.Coefficient signs for the variables GDP and Exchange Rate are significant and in line with our expectations regarding the sign.001 0.inflation rate x5𝑡 -money supply x6𝑡 . We will use tsls command from gmm package.004 GDP 0.007 Money -0. 10 ) = 9.037 Initial values of the coefficients (Intercept) y_percap Infl 0.016 0. The null hypothesis is that the instrumental variables of each equation are uncorrelated with the .e.550 0. 10 ) = 2.332985e+32 (P-Vavue = 0 ) In this case our null hypothesis suggests that the model fits the data well.866 3.697 (P-Vavue = 5.

rates of inflation.disturbance terms of all other equations. We should find better instruments that will allow us to better specify our model and receive valid estimates. except the assumption. and their effect on the prices in the housing market. p-value = 1 According to our results Hausman test statistic is smaller than p-value. In our case null hypothesis will be that 2SLS is more consistent: Hausman specification test for consistency of the 3SLS estimation data: data Hausman = -10. It shows a positive effect of Income per capita and GDP on the dependent variable. Conclusion In this paper we used OLS and 2SLS models to analyze the changes in residential property prices in Russian market during the years 1995-2011. We use it to compare our OLS and 2SLS models. money supply. . gave us significant results. GDP. Results obtained after using 2SLS model did not prove significant enough to be taken into account. This statement can be cause the presence of multicollinearity in our model. i. which means that we can reject the null hypothesis and affirm that OLS estimators are more consistent. We assumed that there are direct dependencies between price of residental real estate and income per capita. rate of inflation. 5. growth of the value of the money supply in economy and exchange rate.e. GDP. Estimation results confirmed our assumptions. that the growth of the value of money supply in economy leads to growth of real estate price. while money supply and exchange rate have a negative impact. when controlled for multicollinearity. We investigated the roles of such factors as disposable income. Inflation rate is virtually close to zero. Our Ordinary Least Squares parameters. df = 6. it does not have a significant effect on the real estate prices. oil prices.5746.

Current situation and forecast” Kaganova. "Residential property price statistics across the globe". B. Andrew T. vol. & Yu. & Yu. Zollino. Michela & Szemere Robert & Tsatsaronis Kostas. Yiu. Jornal of Real Estate Literature. Elsevier. Testing for multiple bubbles. "Prices of residential property in Italy: constructing a new indicator". P. S. Francesco & Muzzicato. September 2014. ." Journal of Asian Economics. 2013. Matthew S. Federal Reserve Bank ofKansas City. Jun & Jin. Roberto. O. Questioni di Economia e Finanza (Occasional Papers) 17. “Residental real estate and Russian market of residential real estate. (2007). & Shi.Z. & Prazukin. BIS Quarterly Review. (1999). C. Denis K. Bank of Italy. & Worzala Elaine (2004). S. Scatigna. Tatyana Y. 2014. & Ovsyannikova. Housing and the Monetary Transmission Mechanism. presented at “Jackson Hole Symposium”. Jornal of Real Estate Literature. J. Singapore Management University. “Russian Home-Bulding in Transition”. (2011). 31 August-1 September. “The Development of Residential Real Estate Market in Russia”.Reference Allen. Economic Research and International Relations Area. Phillips. F. pages 115-124. "Detecting bubbles in Hong Kong residential property market. Salvatore & Sabbatini. 363-374 Intesco Research Group (2013). 65-76 Mishkin. Lu. 28(C). 2008.

48 1784.5 30.79902 -0.38 2009 47.42 147.86 8.93 8.16 2002 12.973039 0.5 4823.977941 -0.9 8.62 1996 2.29 148.789216 -0.5 24.50 represent a large associate or relationship.76471 0.03 11 357.4 2007.8 13713.91 5417.34 0.66 1997 3.720588 1 -0.718137 oil_price 0.33 2007 47.8 282. or the effect size.17 15.68 764.92892 -0.81618 1 0.9 10830.22 1861.5 30.3 18.96 1999 7 462.47 2011 43.05 262.94 794.8 28.87 11756 33247.14 2425.98 1.781863 ex_r 0.19 Table 2: Correlation test results (Pearson method) h_price oil_price y_percap Pop Infl Money GDP ex_r h_price 1 0.65686 Infl -0.1 21609.5 17027.97549 -0.06 1943.05 148.1 3.93627 -0.93873 -0.01 13.3 146.65441 0.81618 0. where coefficients between .2 30.781863 1 Effect size: Cohen’s standard is used to evaluate the correlation coefficient to determine the strength of the relationship.977941 0.28 12839.1 1054.5 2696.5 5.25 142.81618 1 0.2 13208.5 3.997549 0.24 22.93627 -0.968137 -0.65 2000 8.32 919.17 11.73284 0.96 11.5 2.81618 -0.752451 y_percap 0.30 and .09 24.977941 1 -0.997549 -0.968137 0.87 113.23 146.88 142.11 142.752451 0.74 3928.93873 1 0.57 735.2 8943.93873 -0.1 142.958333 1 0.29 21.65441 Money 0.8 1448.985294 0.5 407.968137 0.789216 0.6 32.99 144.69 148.968137 0.985294 0.13 2003 16.85 79.6 5.Appendix Table1 : Data Description Price on housing market Year code Price of oil Thousand rubles/ square meter y Per capita incomes Population size Rate of Inflation Money supply GDP Exchange rate roubles/ barrel thousands ruble/ month (millions) (%) billions billions dollar to ruble x1 x2 x3 x4 x5 x6 x7 1995 2.97549 -0.2 41276.54 2008 52.6 7305.89 7.41 106.78 18264.6 195. and coefficients above .49 represent a medium association.29 represent a small association.6 27 2001 10.46 131.24 2010 48.718137 0.973039 0.10 and .1 21920 55799.8 29.6 28.73284 -0.52 19.79902 0.2 29.92892 -0.3 38807.958333 0.25 1.99 2835. coefficients between .789216 Pop -0.720588 -0.44 145.78 2004 20.22 11.789216 GDP 0.5 5.2 20.89 20.78 2006 36.05 17.9 46308.19 1.93873 -0.4 2629.22 141.997549 0.41 23.75 9 7974.94 13.69 3573.2 31.47 10.54 36.87 6.46 147.72 1819.08 143.997549 1 0.65686 -0.39 1519.977941 1 -0.08 142.41 4.8 84.56 1998 5.6 663.76471 -0.4 26917.45 2005 25. .8 4.93 11.2 26.21 144.1 1428.4 2342.81 1127.