Residential Property Market Performance and Extreme Risk Measures

Higgins, David (2016) Residential Property Market Performance and Extreme Risk Measures. Pacific Rim Property Research, 22 (3). p. 21. ISSN 1444-5921

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Abstract

Residential property is a popular investment option and has historically attracted small Australian individual investors with debt financing lowering the initial equity component, favourable tax structure and past evidence of good returns. A major concern with this approach is uncertainty, where stable assumptions cease to hold and there is concentrated negative price movement. This extreme downside volatility may not be fully reflected in traditional risk calculations. This research studies 40 years of quarterly Melbourne established residential property market performance data for normal distribution features and signs of extreme downside risk. The results show that the normal bell curve distribution underestimated actual extreme values both by frequency and extent for ungeared residential property data. This is magnified as the gearing is increased to an extent where the outermost data point on 80% debt leverage shows an unrealistic probability of a 1 in 192 year event. Alternatively adopting the Cubic Power Law of returns, the probabilities of the most extreme event occurring drops to a realistic 1 in 38 year event. In highlighting the challenges to measuring the impact of leverage on residential property market performance, the analysis of extreme downside risk should be separated from traditional standard deviation risk calculations.

Item Type:	Article
Additional Information:	This is an Accepted Manuscript of an article published by Taylor & Francis in Pacific Rim Property Research Journal on 1st September 2016, available online: http://dx.doi.org/10.1080/14445921.2016.1225152
Identification Number:	https://doi.org/10.1080/14445921.2016.1225152
Dates:	Date Event 1 September 2016 Published Online 13 August 2016 Accepted
Uncontrolled Keywords:	Extreme risk, standard deviation, housing market performance, power law distribution
Subjects:	CAH13 - architecture, building and planning > CAH13-01 - architecture, building and planning > CAH13-01-01 - architecture CAH13 - architecture, building and planning > CAH13-01 - architecture, building and planning > CAH13-01-02 - building CAH13 - architecture, building and planning > CAH13-01 - architecture, building and planning > CAH13-01-04 - planning (urban, rural and regional)
Divisions:	Faculty of Computing, Engineering and the Built Environment Faculty of Computing, Engineering and the Built Environment > School of Engineering and the Built Environment Faculty of Computing, Engineering and the Built Environment > School of Engineering and the Built Environment > School of Built Environment
Depositing User:	Ian Mcdonald
Date Deposited:	09 Dec 2016 11:41
Last Modified:	22 Mar 2023 12:16
URI:	https://www.open-access.bcu.ac.uk/id/eprint/3674

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