Do real estate investment companies profit from house price growth? Evidence from Portugal
International Journal of Housing Markets and Analysis
ISSN: 1753-8270
Article publication date: 27 March 2023
Abstract
Purpose
This study aims to study the sensitivity of nonlisted real estate investment companies’ accounting earnings to house prices. This study evaluates whether house price changes determined these companies’ return on equity (ROE) or if other factors influenced the industry’s profitability beyond house price growth.
Design/methodology/approach
The authors collected a ten-year sample with the aggregate ROE of Portugal’s real estate investment companies, split by regions, and data on house prices and the per capita gross domestic product as a control variable. The authors ran a national-level time series with the canonical cointegrating regression estimator, which is robust to a small sample size; the authors also performed a regression on regional-level panel data with the common correlated effects mean group estimator, thus allowing slope coefficient heterogeneity and controlling for cross-sectional dependence. The authors also ran ordinary least squares regressions as a means of comparison.
Findings
This study found that an increase in the house price is not translated into an increase in the aggregate ROE. The results are robust with a reduced survivorship-biased sample, meaning that even the best-succeeded real estate investment companies do not have their accounting ROE dependent on house price growth.
Research limitations/implications
The sample size is small and specific to one country. This paper did not study the housing market structure to verify whether it operates under monopolistic competition, which could further explain the attained results.
Practical implications
Policy decision-makers should know that there are no excess profits in the real estate investment companies’ industry because of house price growth that could be subject to windfall taxes.
Originality/value
To the best of the authors’ knowledge, the connections between house prices and real estate investment companies’ accounting earnings have never been studied.
Keywords
Acknowledgements
The authors thank Dr Richard Reed, Editor of the International Journal of Housing Markets and Analysis, and three anonymous reviewers’ valuable contributions that helped to improve the research paper.
The authors thank the ISAG – European Business School and Research Center in Business Sciences and Tourism (CICET-FCVC) and the Center for Economics and Finance at the University of Porto (cef.UP), for supporting this research paper.
Data sharing does not apply to this article as no new data were created or analyzed in this study.
Citation
Cunha, A.M., Borges, A.P. and Ferreira, M. (2023), "Do real estate investment companies profit from house price growth? Evidence from Portugal", International Journal of Housing Markets and Analysis, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJHMA-01-2023-0007
Publisher
:Emerald Publishing Limited
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