Journal of Property Investment & Finance

Purpose – The purpose of this paper is to investigate the causal relationship between risk experienced within the real estate industry and that of the overall market in the UK context. The motivation behind this research is to investigate whether the real estate sector transmits risk to the wider marketplace and whether this phenomenon existed, or was exacerbated, during the most recent financial crisis.

Design/methodology/approach – The study was undertaken over a 20-year timeframe, from 1990 to 2010, with special attention being awarded to the global financial crisis (GFC) period from 2008 to 2010. The paper first undertakes graphical modeling of market and industry volatilities in an attempt to identify which industry drives market uncertainty. This is followed by quantitative computation of industry-specific volatility, which is employed in examining the relationship between these volatilities using block exogeneity/Granger causality tests. Rolling sample analysis and impulse response functions are employed as robustness tests to substantiate the main results.

Findings – First, the analysis confirms research that finance industry volatility is a leader in driving market volatility. Second, it expands on these findings to identify the real estate sector as being a key source of this causal relationship. It finds that real estate risk is the one that regularly drives finance industry volatility over the 20-year sample period. Third, and most importantly, it emerges that the causal link between the real estate sector and market volatility is at its strongest leading up to the most recent financial crisis. More specifically, the real estate investment trusts sub-sector of real estate industry volatility is the one that has the strongest unidirectional relationship with market-wide volatility, both directly and indirectly, through driving the finance industry volatility during the GFC.

Originality/value – These findings are significant for market participants, such as pension funds, which need to protect their assets from a stock market crash. Furthermore, anticipating a downturn by observing the trends in real estate sector volatility is highly advantageous in informing their trading strategies now and into the future. Policy makers likewise need a signal of an impending credit crunch and can utilize real estate market statistics to pre-empt a freezing up of the credit markets.