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Foreign investments in real estate, economic growth and property prices:

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Foreign investments in real estate,

economic growth and property prices:
evidence from OECD countries
a a
Hassan Fereidouni Gholipour , Usama Al-mulali & Abdul Hakim
a
Mohammed
a
Center for Real Estate Studies (CRES), Universiti Teknologi
Malaysia (UTM), Skudai, Malaysia
Published online: 22 Jan 2014.

To cite this article: Hassan Fereidouni Gholipour, Usama Al-mulali & Abdul Hakim Mohammed ,
Journal of Economic Policy Reform (2014): Foreign investments in real estate, economic growth
and property prices: evidence from OECD countries, Journal of Economic Policy Reform, DOI:
10.1080/17487870.2013.828613

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 Journal of Economic Policy Reform, 2014
http://dx.doi.org/10.1080/17487870.2013.828613

Foreign investments in real estate, economic growth and property

prices: evidence from OECD countries

nly
Hassan Fereidouni Gholipour*, Usama Al-mulali and Abdul Hakim Mohammed

Center for Real Estate Studies (CRES), Universiti Teknologi Malaysia (UTM), Skudai, Malaysia

The last two decades have witnessed a growth in foreign direct investments (FDI) in
Downloaded by [Universiti Teknologi Malaysia] at 17:50 22 January 2014

the real estate sector in most of the Organization for Economic Co-Operation and
Development (OECD) countries. It is argued that FDI in the real estate sector may
improve economic growth in recipient economies. On the other hand, property
prices have increased considerably in OECD countries in recent years and some
argue that FDI in real estate is one of the driving forces of high property prices in
fO
these countries. The purpose of this study is to analyze the interrelationship between
FDI in the real estate sector, economic growth, and property prices while controlling
for interest rate and inflation. We use observations from a set of OECD countries
for the period between 1995 and 2008. The dynamic interrelationship is analyzed by
applying a panel cointegration technique. Our empirical results show that FDI in
real estate do not cause property price appreciations and also do not contribute to
economic growth in OECD countries in the short run and the long run.
Keywords: real estate sector; foreign investments; property prices; economic
growth; cointegration; OECD countries
JEL Classifications: F41, F21, G12
oo

1. Introduction
Many countries encourage foreign direct investment (FDI) to promote their economic
growth and stable development. A recent development in FDI flows is the emergence
of FDI in services which has been gradually supplanting the traditional FDI in manu-
facturing and primary sectors (UNCTAD 2004; Doytch and Uctum 2011). The increase
of FDI in services is mainly due to the growing importance of services in global gross
domestic product (GDP) and the limited tradability of many services (UNCTAD 2004,
Pr

2006; Kolstad and Villanger 2008).

Within the services, the real estate sector has been experiencing a significant move-
ment toward greater internationalization and consequently FDI in real estate (FDIRE)
has been rising in many countries (UNCTAD 2011). For example, FDIRE alone
accounted for more than 20% of total inflows to China in 2010 (UNCTAD 2011) and
it represents nearly 40% of total FDI inflows in Spain (Rodríguez and Bustillo 2010).
Likewise, real estate ranked second only to India’s computer software industry in
attracting FDI in 2007 (Economist Intelligence Unit 2008).
Similar to the FDI in other service sectors (e.g. financial sector, transportation),
FDIRE has also been found as a driving force of economic growth by stimulating
activity in its own sector and other sectors (Ning and Yu 2009; Fung, Jeng, and Liu

*Corresponding author. Email: hassanhgf@gmail.com

© 2013 Taylor & Francis

 2 H.F. Gholipour et al.

2010). Moreover, Basu and Yao (2009) and Wang (2010) have shown that FDIRE
leaves a favorable impact on the enrollment in higher education through higher demand
for property analyzers and architectures as well as employment. FDIRE also increases
international tourism in the host economy because tourism follows from acquiring a
property in a foreign country (Rodríguez and Bustillo 2010). However, recent evidence
shows that FDI in services is not always growth enhancing. In particular, FDI in nonfi-
nancial services (such as transportation, real estate, and education) can drain resources
and hurt growth in manufacturing (Doytch and Uctum 2011).

nly
Although FDIRE may contribute to economic growth, the property price apprecia-
tions hidden behind this situation should not be ignored. Several economists and
observers argue that property price increases in some economies have been stimulated
by the increased amount of FDIRE (e.g. Mihaljek 2005; Ben-Yehoshua 2008; Cordero
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and Paus 2008; Rodríguez and Bustillo 2010). In other words, FDIRE is considered to
be one of the responsible factors for the property price appreciations in several coun-
tries, and its regulation has become an important governmental issue (e.g. He, Wang,
and Cheng 2009). In contrast, others argue that FDIRE is not a cause of property price
increases in recipient economies because FDIRE is a tiny portion of the total real estate
fO
investments (e.g. Chan 2007).
There is a large amount of literature which explains the relationship between FDI
and GDP, GDP and property prices, as well as FDI and property prices over the past
three decades. However, so far, there has been no systematic investigation analyzing
the interrelationship between property prices, economic growth, and FDIRE while con-
trolling for the other relevant determinants of property prices: interest rate and inflation.
Moreover, there has been a growing interest in examining the effect of capital inflows
(e.g. aggregate capital inflow, FDI, portfolio investment, hot money) on asset prices in
recent years (e.g. Bo and Bo 2007; Kim and Yang 2009, 2011; Guo and Huang 2010).
While there are a series of published papers on the relationship between capital inflows
oo

and asset prices, to the best of our knowledge, no empirical study has focused on the
impact of FDIRE on property prices. To address these gaps, the present paper empiri-
cally investigates the dynamic interrelationship in the GDP growth-FDIRE-property
prices-interest rate-inflation nexus by applying a panel cointegration technique and a
panel causality test using data from (OECD) countries.
The focus of this study is on OECD countries due to the availability of data for
FDIRE and property prices. This interaction is of particular relevance for policy-makers
in OECD countries. Economic growth, which is a part of the above-mentioned nexus,
Pr

has been a challenging issue in these countries since the 2008 global financial crisis
(Gurría 2012). In recent years, the real GDP growth in OECD countries has been much
lower than other economic associations. Therefore, the results of this study would help
policy-makers to have a better and more precise understanding of whether FDIRE
(which increased significantly in most of the OECD countries over the last two dec-
ades) can contribute to economic growth.
The remainder of this paper is organized in the following fashion. Section 2 sum-
marizes some of the relevant studies/literature review. Section 3 provides some stylized
facts for the FDIRE, property prices, and economic growth in OECD countries. Sec-
tion 4 explains the variables and data. Section 5 outlines the model and estimation
methodology and the econometric results are presented and discussed in section 6.
Finally, Section 7 makes some concluding remarks.
 Journal of Economic Policy Reform 3

2. Literature review
The relationships between FDI and economic growth, FDI and property prices as well
as property prices and economic growth have been analyzed empirically over the past
three decades. More recently, some researchers have combined earlier approaches by
examining the dynamic relationship between capital inflows (FDI in particular), eco-
nomic activities, asset prices, and other macroeconomic factors such as inflation rate
and interest rate. In fact, there have been basically four research strands in the existing
literature. This section of paper intends to briefly review some of these studies.

nly
The first strand of research focuses on the FDI and economic growth nexus. Some
have argued that economic growth is a positive and significant determinant of FDI (e.g.
Ramasamy and Yeung 2010), because higher economic growth reflects the future
potential of the market, and thus, attracts FDI to host economies. Similar to aggregate
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FDI, Gholipour and Masron (2011) found that market size (measured by GDP per
capita) has a positive impact on FDIRE in OECD countries. On the other hand, some
researchers found that FDI has a positive effect on economic growth (e.g. Borensztein,
De Gregorio, and Lee 1998; Baharumshah and Thanoon 2006; Vadlamannati and
Tamazian 2009; Merlevede and Schoors 2007) because FDI is an important source of
fO
capital, complements domestic private investment, is usually associated with new job
opportunities and enhancement of technology transfer, and boosts overall economic
growth in host countries (Chowdhury and Mavrotas 2006).
The second strand of the research mainly focuses on studies that examine the rela-
tionship between FDI and property prices. On the one hand, some found that capital
inflows (including FDI) can help to boost the increase in property prices in host coun-
tries (e.g. Kim and Yang 2011; Bo and Bo 2007). There are some ways that FDI may
result in increased real estate prices: (1) direct demand for assets, (2) liquidity, and (3)
economic booms. First, the increased level of foreign capital into the real estate market
oo
would raise the demand for property. Since in the short run the supply of real estate is
relatively fixed, this would tend to drive real estate prices up (Mihaljek 2005; Kim and
Yang 2009). The second channel is a liquidity channel that may allow capital inflows
to result in an increased money supply and liquidity, which in turn boost asset prices
(Kim and Yang 2009). Regarding the third channel, capital inflows tend to create eco-
nomic booms in a country, which then leads to an increase in asset prices (World Bank
2001; Kim and Yang 2009). On the other hand, some found that property price
increases in a host country attract FDI in the real estate sector (e.g. He, Wang, and
Pr

Cheng 2009) because returns to capital are particularly important since foreign inves-
tors face business risks and external uncertainties.
The third strand is related to the output-property prices nexus. It is expected that an
increase in economic activities through, e.g. an increase in employment (resulting in a
hike in households’ labor income) or real industrial production increases the demand for
houses. Since the real estate stock cannot change in the short run, rents increase leading
to higher house prices (Adams and Füss 2010). Moreover, a higher labor income
increases the possibility to get loans in the mortgage market. Therefore, housing demand
increases which translates into higher house prices (Demary 2010). On the other hand,
higher house prices increase households’ wealth. This increase in wealth would lead to
higher consumption expenditures which push output through higher aggregate demand
(Iacoviello 2004; Demary 2010; Piazzesi, Schneider, and Tuzel 2007).
Finally, a fourth stream of research has emerged, which combines earlier works by
examining the dynamic relationship between capital inflows, economic activities, asset
 4 H.F. Gholipour et al.

prices, and other macroeconomic factors such as inflation rate and interest rate. Several
examples of studies in this context are Kim and Yang (2009, 2011), Brixiova, Vartia,
and Worgotter (2010), and Guo and Huang (2010). For example, Kim and Yang (2011)
empirically examined the effects of capital inflows on asset prices (including stock,
land and nominal and real exchange rates) among emerging Asian economies (South
Korea, Indonesia, Malaysia, Philippines, and Thailand). Their empirical results sug-
gested that capital inflows contributed to asset price appreciations in emerging Asian
economies.

nly
3. Some stylized facts about FDIRE, property prices, and economic growth in
OECD countries
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This section sets the scene for the empirical analysis that follows by presenting some
stylized facts for FDIRE, property prices, and economic growth in OECD countries.
The last two decades have witnessed a strong growth in FDIRE in OECD coun-
tries. The FDIRE has recorded impressive growth during the 1995–2008 period, with
an annual growth rate of 40% (see Figure 1).1 In 1995, FDIRE was only US$ 2767
fO
million, while by 2008 it reached to US$ 20,932 million.2 The increases in foreign
investment flows to OECD countries’ real estate sectors are largely due to the liberal-
ization of investment regimes, the protection and promotion of FDIRE, and the matu-
rity of real estate markets. According to the extensive study done by Golub (2009)
on openness to FDI in services, most of the OECD countries are scored as more
open to the foreign investments in the real estate sector compared with non-OECD
countries (see Table 1).
Similarly, during 1995–2008, house prices in real terms (the ratio of actual house
prices to the Consumer Price Index) rose rapidly across the vast majority of OECD
economies. The housing boom was closely tied to the expansion of credit in these
oo

economies (Kim and Renaud 2009). Figures 2(a) and (b) based on OECD Statistics,
show real house price trends in some countries under study. The figures show that
house prices rose in most of these countries, particularly in emerging OECD econo-
mies. Moreover, it can be seen that real house prices show more variation in emerging
OECD economies than in developed OECD countries.
Finally, as can be seen from Figure 3, over the period of study (1995–2008), aver-
age economic growth in OECD countries was 2.6% with maximum real GDP growth
in 2000 (4.1) and minimum in 2008 (0.2). However, the real GDP growth in OECD
Pr

45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 1. FDI inflows to real estate sector (US$ millions) in OECD countries, 1995–2008.
Source: OECD international direct investment.
 Journal of Economic Policy Reform 5

Table 1. FDI restrictions index-business sector (including real estate).

OECD Score Non-OECD Score

Belgium 0.03 India 0.20
Denmark 0.13 Indonesia 1.00
Finland 0.11 Kenya 0.35
France 0.04 Malaysia 0.68
Germany 0.03 Pakistan 0.41
Greece 0.05 Philippines 1.00

nly
Hungary 0.11 Qatar 0.40
Netherlands 0.03 Saudi Arabia 0.25
Norway 0.12 Thailand 0.45
Spain 0.12 Tunisia 1.00
Sweden 0.12 Venezuela 0.83
Downloaded by [Universiti Teknologi Malaysia] at 17:50 22 January 2014

Turkey 0.14 China 0.29

UK 0.03 Colombia 0.26
USA 0.05 Ghana 0.25
0–1 scale, 0 = open, 1 = closed.
Source: Golub (2009).
fO
140.00

120.00

Austria 100.00
Denmark
Finland 80.00
Germany
Japan 60.00
Netherlands
oo

Norway 40.00

20.00

0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 2(a). Real house prices in developed OECD economies (2005 = 100).
Source: OECD main economic indicators of OECD Statistics.
Pr

160.00

Czech 140.00

120.00
Hungary
100.00
South Korea
80.00
Mexico
60.00
Slovakia
40.00
Turkey 20.00

0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 2(b). Real house prices in emerging OECD economies (2005 = 100).
Source: OECD main economic indicators of OECD Statistics.
 6 H.F. Gholipour et al.

12.0
10.0
8.0
6.0
4.0
ASEAN
2.0
GCC
0.0
OECD
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-2.0
-4.0

nly
-6.0
-8.0
-10.0

Figure 3. Real GDP growth in OECD, ASEAN, and GCC.

Downloaded by [Universiti Teknologi Malaysia] at 17:50 22 January 2014

Source: Global market information databases.

countries was much lower than in other economic associations such as the Association
of Southeast Asian Nations (4.7%) and the (Persian) Gulf Cooperation Council (4.6%)
fO
between 1995 and 2008. Moreover, for the OECD area as a whole, real GDP growth is
lower in the 2000s compared with the previous three decades (1970–1980 = 3.4; 1981–
1990 = 3.2; 1991–2000 = 2.8; and 2001–2008 = 2.2). Economic growth has become a
challenging issue for policy-makers in these countries as the real GDP growth contin-
ues to fall in 2012 (1.4).

4. Variables and data

The main purpose of this study is to explore the relationship between economic growth,
FDIRE, and property prices in selected OECD countries. However, in order to estimate
oo

the impact of the variables of interest (economic growth and FDIRE), we need to con-
trol other potentially important variables that can influence property prices such as
interest rate and aggregate price level. Both of the control variables can have bidirec-
tional relations with property prices.
A higher interest rate can reduce real estate prices in two ways. First, a higher inter-
est rate increases the return of other fixed-income assets (such as bonds) relative to the
return of real estate, thus shifting the demand from real estate into other assets leading
Pr

to lower real estate prices. Second, a higher interest rate is reflected in higher mortgage
rates, which reduces demand and decreases real estate prices (Adams and Füss 2010;
Demary 2010). This argument is based on a model developed by DiPasquale and
Wheaton (1996). On the other hand, increasing real estate prices raises the value of col-
lateral. Therefore, banks may increase their credit supply which leads to lower interest
rates (Demary 2010).
Another important variable that is likely to have an impact on domestic asset price
is the aggregate price level. For example, Anari and Kolari (2002) showed that a long-
run relationship exists between house prices and nonhousing goods and services prices.
A plausible explanation for this relationship is that inflation increases the construction
costs of new houses. Higher construction costs result in higher new house prices. Since
existing houses are close substitutes for new houses, higher new house prices increase
the replacement costs of existing houses and, in turn, their prices (Anari and Kolari
2002). Another explanation is that households might try to protect their wealth from
inflation by investing in real estate when the price level increases. Thus, property prices
 Journal of Economic Policy Reform 7

rise due to the higher demand for properties. This argument is based on (Fama and
Schwert’s 1977) framework which shows how assets can be attractive investment vehi-
cles to provide an effective hedge against inflation. On the other hand, when real estate
prices are increasing, inflationary pressures arise, and therefore, push aggregate
demand. Furthermore, agents try to get higher rents when house values rise. This
explains the cost of living increases which are contained in the price index (Demary
2010).
We use annual data from 1995 to 2008 for the following 21 OECD countries: Aus-

nly
tria, Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Japan, Mexico, the Netherlands, Norway, Poland, Slovakia, South
Korea, Spain, Sweden, the UK, and the USA. Included are all OECD countries for
which data on FDIRE and PPRIC variables is obtainable. The annual data for FDI
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inflows to the real estate sector (in millions of US dollars) are obtained from the OECD
International Direct Investment Database. FDIRE includes selling or buying real estate,
renting real estate, and providing other real estate services such as appraising real estate
by foreign individuals and enterprises, whenever these foreigners do not maintain a per-
manent residence in the host country. Data for GDP are obtained from the International
fO
Monetary Fund (IMF). GDP is the sum of gross value added by all resident producers
in the economy plus any product taxes and minus any subsidies not included in the
value of the products. Information on inflation and the lending interest rate also come
from the IMF. According to the IMF, inflation as measured by the consumer price
index reflects the annual percentage change in the cost to the average consumer of
acquiring a basket of goods and services that may be fixed or changed at specified
intervals, such as yearly. The lending rate is the bank rate that usually meets the short-
and medium-term financing needs of the private sector. Finally, we use the Bank of
International Settlements house price data as a proxy for property prices.
oo

5. Model and methodology

5.1. Model
Following the empirical literature, we specify the long-run relationship between prop-
erty prices, FDIRE, GDP, interest rate, and the inflation rate in a linear logarithm form
as follows:
Pr

InPPRICit ¼ b0 þ b1InFDIREit þ b2InGDPit þ b3IRit þ b4INFit þ uit (1)

where i = 1, … , N denotes the country, t = 1, … ,T denotes the time period, and uit is
assumed to be the serially uncorrelated error term. The variables lnPPRIC, lnFDIRE,
and lnGDP represent the natural logarithms of property prices, FDI inflows to the real
estate sector and real GDP, respectively. The IR and INF represent the interest rate and
inflation rate.

5.2. Cointegration methodology

The dynamic causal relationships between PPRIC, GDP, FDIRE, IR, and the INF are
examined by the panel cointegration approach in this study. The analysis has three
steps.
The first step is to verify the order of integration for the variables, because the vari-
ous cointegration tests are valid only if the variables have the same order of integration
 8 H.F. Gholipour et al.

(Pao and Tsai 2011). We employ three types of unit root tests: the Fisher-type test
using Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and Im, Pesaran Shin
(IPS). These three tests assume that there are individual unit root processes across the
cross sections. For these tests, the null hypothesis is that there is a unit root, while the
alternative hypothesis is that some cross sections do not have a unit root.
In the second step, when all series are integrated into the same order, Pedroni, Kao,
and Johansen Fisher methods are used to test whether there is a long-run cointegration
relationship between the variables. The Pedroni tests are based on the Engle and Gran-

nly
ger (1987) two-step (residual based) cointegration tests. Pedroni (1999, 2004) provides
seven statistics to test the null hypothesis of no cointegration in the heterogeneous pan-
els. Out of seven, four tests are within the dimension (panel tests) and three tests are
between dimensions (group tests). The Kao cointegration test follows the same basic
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approach as the Pedroni test, but it specifies cross-section specific intercepts and homo-
geneous coefficients on the first-stage regressors (Al-mulali 2011). Finally, the Johansen
Fisher panel conintegration test is the panel version of the individual Johansen coninte-
gration test. This test is based on the aggregates of the p-values of the individual Jo-
hansen maximum eigenvalues and trace statistics (Maddala and Wu 1999).
fO
If cointegration exists among the variables, the ordinary least squares (OLS) method
is applied to ensure that the estimate Equation (1) does not lead to a spurious regres-
sion result. Furthermore, the parameters estimated by OLS are consistent. The β1, β2,
β3, and β4 are the long-run FDIRE elasticity, real GDP elasticity, interest rate elasticity,
and inflation elasticity, respectively.
Finally, if a long-run relationship between the variables is found, the last step is to
estimate the panel vector error correction model in order to examine the Granger causal
relationship between the variables. In other words, the existence of cointegration indi-
cates that there are long-run equilibrium relationships among the variables and thereby
Granger causality among them exists in at least one direction. The vector error-correc-
oo

tion model is used for correcting disequilibrium in the cointegration relationship, cap-
tured by the error correction term (ECT), as well as to test for long-run and short-run
causality among cointegrated variables (Pao and Tsai 2011). If the ECT is statistically
significant, it can be concluded that there exists a long-run relationship among the vari-
ables. It should be noted that the optimal lag length in each equation is selected
through maximizing the value of the R2 and Akaike information criterion (AIC).
Pr

6. Empirical results

6.1. Panel unit roots and panel cointegration tests

As a preliminary step, we perform three types of unit root tests (ADF, PP, and IPS) to
determine the order of integration of the series. The results suggest that all series
appear to contain a panel unit root in their levels but are stationary in their first differ-
ences, indicating that they are integrated at order one (see Table 2).
We then proceed to determine the existence of cointegration relationships, using the
testing approach suggested by Pedroni, Kao, and Johansen Fisher. The results of panel
cointegration between variables are presented in Table 3. Four of the seven Pedroni
tests suggest that there is panel cointegration among the variables. Similarly, the Kao
test suggests panel cointegration at 1% level of significance. The Fisher test also sug-
gests the existence of five cointegrating vectors. Given these results, we can conclude
that there is a panel cointegration among GDP, FDIRE, PPRIC, IR, and INF for OECD
 Journal of Economic Policy Reform 9

Table 2. Results of panel unit root tests.

Unit root tests

Variable
ADF PP IPS
Level 1st diff. Level 1st diff. Level 1st diff.
*** ***
lnGDP 31.55 68.78 18.16 83.93 1.12 −3.09***
lnPPRIC 52.32 73.60*** 30.06 99.77*** 0.59 −1.98***

nly
lnFDIRE 23.65 127.46*** 17.50 153.42*** 0.15 −5.09***
IR 50.13 96.76*** 19.43 135.20*** 0.44 −1.86**
INF 49.56 91.13*** 34.91 175.64*** 1.30 −2.05**
* **
, and *** indicate the rejection of the null hypothesis at 10, 5, and 1% level of significance, respectively.
The lag lengths are selected using AIC.
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Table 3. Results of panel cointegration tests.

Test statistics Statistics

Pedroni test
Panel v-Statistic (weighted)
Panel rho-Statistic (weighted)
Panel PP-Statistic (weighted)
fO −2.031
2.667
−2.377***
Panel ADF-Statistic (weighted) −1.877**
Group rho-Statistic 4.608
Group PP-Statistic −4.917***
Group ADF-Statistic −1.811**
Kao test
ADF −8.179***
Fisher test
Trace Max-eigenvalue
oo
None 21.19*** 21.19***
At most 1 55.26*** 55.26***
At most 2 34.17*** 19.36***
At most 3 23.01*** 19.58***
At most 4 11.89** 11.89**
** ***
and indicate the rejection of the null hypothesis at 5 and 1% level of significance, respectively.

countries. As mentioned earlier, evidence of cointegration among variables can rule out
Pr

the possibility of a spurious estimation. Thus, we can write the panel cointegration
Equation (2) as
lnPPRIC ¼ #10:419 # 0:004 lnFDIRE þ 1:161 lnGDP # 0:010 IR þ 0:027 INF ð2Þ

½#0:213' ½13:862'((( ½#0:811' ½2:103'((

where the numbers in brackets are t-statistics, and *** and ** indicate 1 and 5% level
of significance, respectively. The adjusted R-squared is 0.96. GDP and inflation vari-
ables have positive and significant effects on property prices whereas FDIRE and inter-
est rate are not significantly related to property prices. More specifically, the long-run
elasticity of PPRIC with respect to GDP is above unity (1.16), indicating that for every
1% increase in GDP, the PPRIC is increasing by 1.16%. The result of the equation also
indicates that a 1% increase in inflation increases property prices by 0.027%.
 10 H.F. Gholipour et al.

Table 4. Results of the panel causality tests.

Source of causation (independent variables)

Dependent variable
Short-run
Long-run
ΔlnPPRIC ΔlnGDP ΔlnFDIRE ΔIR ΔINF ECT (−1)
F-statistics t-statistics
ΔlnPPRIC – 4.754*** 0.124 1.441 4.025*** −0.442

nly
ΔlnGDP 2.930** – 0.165 5.150*** 6.315*** 1.655*
ΔlnFDIRE 0.006 0.002 – 0.213 0.201 0.303
ΔIR 1.922* 1.818* 0.385 – 0.542 −1.880*
ΔINF 2.672** 14.37*** 2.846** 3.622** – 2.474**
*** ** *
, and indicate 1, 5, and 10% level of significance, respectively.
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6.2. Panel causality tests

The panel Granger causality results are presented in Table 4. The short-run dynamics
suggest that there is a bidirectional causality relationship between GDP and property
fO
prices (PPRIC). In other words, there is a causal relationship running from GDP to
PPRIC and vice versa. This result is consistent with Demary (2010), who found that
there is a bidirectional relationship between output and property prices in OECD coun-
tries. We also find that there is no causal link between FDIRE to PPRIC. This means
that foreign investments in the real estate sector do not cause higher property prices
and also heightening property prices do not attract greater amounts of FDIRE in the
short term in OECD countries. This result is not consistent with He, Wang, and Cheng
(2009), Rodríguez and Bustillo (2010), Cordero and Paus (2008) and Mihaljek (2005),
who found that there is a significant relationship between FDIRE and property prices.
Moreover, the results show that there is no causal relationship between GDP and
oo

FDIRE, which is inconsistent with Gholipour and Masron (2011), who found that GDP
is a significant determinant of FDIRE in OECD countries over the period 2000–2008.
The findings also indicate that there are interest rate-GDP, inflation-GDP, and inflation-
property prices bidirectional causality relationships. Furthermore, the short-run dynam-
ics suggest unidirectional causality from property prices to interest rate, from interest
rate to inflation rate, and from FDIRE to inflation rate.
The coefficients of the ECT (−1) are statistically significant in GDP, interest rate,
Pr

and inflations rate equations, indicating that there are three long-run panel causality
relationships that run from property prices, FDIRE, interest rate, and inflation rate to
GDP, from property prices, FDIRE, GDP, and inflation rate to interest rate, and from
property prices, GDP, FDIRE, and interest rate to inflation rate.
Based on these results, it can be concluded that FDIRE does not have a significant
impact on property prices and GDP in OECD countries in the short run and the long
run. Moreover, property prices are mostly affected by economic activities (GDP) and
inflation in the short run. The results also show that a bidirectional Granger causality
exists between GDP and property prices as well as GDP and inflation rate in both the
short run and the long run.

7. Conclusion
The last two decades have witnessed a growth in FDIRE in most of the OECD coun-
tries. It is believed that FDIRE may improve economic growth in recipient economies.
 Journal of Economic Policy Reform 11

On the other hand, property prices have increased considerably in OECD countries in
recent years and some argue that FDIRE is one of the driving forces of high property
prices. The purpose of this study is to analyze the interrelationship between FDIRE,
economic growth, and property prices after controlling for interest rate and inflation.
Using data from 21 OECD countries over the period 1995–2008 and applying the panel
cointegration approach, our empirical results show that FDIRE does not cause property
price appreciations and also does not contribute to economic growth in OECD coun-
tries in the short run and the long run. Moreover, our results show that property price

nly
appreciations have a positive causal relationship with economic growth in the short run
and the long run.
What are the implications of the results obtained in this paper? Since higher prop-
erty prices are not caused by FDIRE and property prices are mostly affected by other
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macroeconomic factors in OECD countries, policy-makers should not discourage

FDIRE inflows. This is because FDIRE can have positive impacts on other economic
indicators such as improving human capital and increasing tourism inbounds. In addi-
tion, this paper shows the positive impact of property prices on GDP growth. There-
fore, in order to achieve a higher level of economic growth in OECD countries, the
fO
property values need to increase consistently over time because rising property prices
increase households’ wealth and thereby aggregate demand.
Finally, it should be noted that the present study only considered the aggregate FDIRE
for analysis. For future research, it may be useful to examine the dynamic relationship
between GDP-FDIRE-property prices-interest rate-inflation rate by using disaggregate
data for various types of FDIRE such as residential, commercial, and industrial properties.
Moreover, future research may apply the same model for developing countries.

Notes
oo

1. More evidences on the recent surges of FDIRE in OECD economies can be seen in Appen-
dix 1.
2. It should be noted that this data is not exact and precise because some of the OECD coun-
tries have not reported the FDIRE data in some years.

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Appendix 1. FDIRE and Gross Value Added (GVA) from real estate activities in
OECD countries

2001 2007
oo

FDI inflows to GVA from real FDI inflows to GVA from real
real estate estate activities real estate (million estate activities
Country (million US$) (million US$) US$) (million US$)
Austria −1.79 28,396.3 306.63 879,694.1
Czech 256.09 7758.4 1680.06 22,233.8
Denmark 24.27 25,179.3 1495.18 50,011.3
Estonia na 1051.3 80.343 3884.5
Finland na 18,768.4 611.91 41,410.2
Pr

France 1997.13 313,540.6 20,091.71 661,145.8

Germany 504.20 405,782.3 3849.41 754,225.9
Greece 0.47 17,580 149.84 37,684.6
Hungary 71.80 7827 649.27 21,118.7
Japan 605.84 805,892.1 1440.23 879,694.1
South 205.2 65,361.9 729.8 137,171.3
Korea
Mexico 156.94 100,433.8 16.34 159,971.3
Norway 101.07 21,828.7 33.96 51,235.9
Poland 126.5 23,350.1 2363.4 51,173.6
Slovakia 55.84 4078.9 600.97 10,540.4
Slovenia na 2594.9 111.34 7211.4
Spain 767.50 83,900.5 2042.43 223,449.9
Sweden 767.50 42,368.6 3290.61 86,767.1
Turkey 0 22,702.5 449 96,450.9
USA −2407 2,331,129.3 2669 3,262,281.4
Notes: GVA data is based on GVA from real estate, renting and business activities.
Sources: OECD international direct investment database and global market information databases.

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