Real Estate Market Stability: Evaluation of the Metropolitan Areas Using Factor Analysis

Abstract

This article is a modern approach to analysing real estate market stability in today’s era. Since economic collapse in 2008, sustainable growth in real estate sector has become a major discussion and avoidance of another housing market bubble is a priority. Although certain measures have been taken by the governments to control economic direction, most recent analysis showed that home prices in San Francisco, New York, Vancouver and other cities are soaring up, leading to new unprecedented historic highs. Whether this price growth is another bubble risk factor is still negotiable, since more scientific evidence needs to be presented. Therefore, this paper develops a “bubble” measure which gives additional insights in trying to assess the current market situation in a more broader perspective. The empirical research was conducted on four different metropolitan areas around the world which demonstrated an outstanding home price growth in the time period of 2008 – 2017. By applying factor analysis to seven different sub-indexes, aggregating them all into one and using benchmark tools this methodological framework allowed researchers to see whether there is an under/over value situation in the real estate market and whether this growth is sustainable. The research results have confirmed that indeed 4 metropolitan areas (San Francisco, Vancouver, London and Sydney) are in the bubble risk zones that could lead to a market correction or even a new recession. Research suggest that growth is no longer sustainable from within the cities natural demand since average income/mortgage ratio has surpassed its normal levels. As the markets become more unstable a price drop should be expected in the near future.

DOI: http://dx.doi.org/10.5755/j01.ee.29.2.19380