Does illiquidity matter in residential properties?. Issue 1 (2nd January 2017)

• Record Type: Journal Article
• Authors: Hwang, Soosung; Cho, Youngha; Shin, Jinho
• Is Part Of: Applied economics. Volume 49:Issue 1(2017)
• Page Start: 1
• Page End: 20
• Publication Date: 2017-01-02
• Subjects: Illiquidity costs -- residential properties -- flight to quality -- flight to liquidity; R31 -- G12; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2016.1189506
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: No, it does not, despite the general perception that illiquidity matters in real estate. As expected, our evidence shows that the illiquidity costs for the U.S. residential properties are large. The costs are equivalent to 12% of the total property returns on average, ranging from 9.5% to 29.5% of property prices depending on the illiquidity level and market conditions. However, when amortized by holding periods, monthly illiquidity costs are on average 0.08%, and illiquidity risk does not appear to be priced in residential properties; illiquid properties do not show higher returns than liquid properties. On the contrary, we find evidence of flight-to-quality in bull markets, that is, high-quality illiquid properties are preferred to low-quality liquid properties in buoyant markets. These results are in sharp contrast with those in equities and bonds where flight-to-liquidity has been reported when markets are in stress.