Factors Affecting Residential Investment Economics Essay

This study will be an attempt to analyze empirically the overall impact of residential investment including housing dwellings in Mauritius. Housing investment has an important impact on household behavior and in return on the household balance sheet.

The main foundation of this study will be to explore how distortion in residential investment including household housing investment affects the Mauritian economy. It addresses three main aims:

Over the last years, the worldwide residential investment including the household sectors who had a massive part of their wealth invested in the household dwellings, have been experiencing dramatic and unusual changes. So, in order to see if there has been any spillover effect over the Mauritian economy, we analyse the effect of the different macroeconomic variables on residential investment in Mauritius and also to see whether their inter relationship has changed over time. The spillover effect fuels up because the Mauritian economy is quite vulnerable to exogenous shocks like the large capital inflows that the economy has been experiencing in the recent financial crisis where the effects of overheating are being felt.

The second main aim of this study will be to see the effect of a contractionary monetary policy like a rise in the real interest rate and a decrease in the money supply on residential investment both in the short run and the long run.

The other main aim of the dissertation will be to analyse the structural features of the housing system in Mauritius including how efficient is the housing market.

The main objective of this study will be to see what macroeconomic policy will need to be implemented to absorb shocks that feed in the economy and distorts the mortgage market. The other objective will be to see if there is a need to diversify the mortgage market in Mauritius as in recent cases; for years the mortgage market have been extremely limited to only four major mortgage lenders which accounts for 85% of the total market asset including housing loans (Centre for affordable housing in Africa 2011, p.61).

The main hypotheses that will be tested are:

FIRST HYPOTHESIS

H1.0: residential investment is less responsive to monetary policy shocks in Mauritius

H1.1: residential investment is quite responsive to monetary policy shocks in Mauritius

SECOND HYPOTHESIS

H2.0: impact of recession on residential investment in Mauritius is quite low.

H2.1: impact of recession on residential investment in Mauritius is quite high.

2. LITERATURE REVIEW

Real estate including residential investment constitutes one of the world most valuable assets due to its durability. Mauritius is mainly characterized by a primary mortgage market. This study is in line with the major objectives of the Mauritian government which is to attract more foreigners to invest in the residential projects like the Integrated Resort scheme(IRS) that have been set up and the social fact that everyone should be entitled to a decent and affordable housing through the self construction process.

Housing investment is important components of household wealth (case et al, 2005).There are a lot of factors that affect the demand and supply of housing investment. Consequently the main factors that affect the demand for housing investment are notably the household disposable income, the population growth rate, the average level of lending interest rate. Hence, borrowing constraint is a main factor that affects the household decision about the housing investment that is to be made. Lamont and stein (1999) shows that household with weak balance sheet adjust their housing demand more strongly in the face of income shocks, which they interprete as being consistent with a strong role for borrowing constraint.

3. PROPOSED METHODOLOGY

To assess the impact of residential investment in Mauritius, a quantitative analysis of the time series data of Mauritius will be done using the stata software (stata 10). An econometric model will be built to assess their economic significance. It also includes various tests that will be done on the regression results such as the test for autocorrelation and multicollinearity. The other different methodologies among others that will be assessed for the model are outlined as follows:

Fit vector autoregressive model

Granger causality test

ADF unit root test

Ordinary least square (OLS)

Engel and granger two step approach

IRF(impulse response-shocking the system)

MODEL SPECIFICATION:

Demand for housing investment

The demand side is deduced as follows:

Hd=f (real gross domestic product, population size, disposable income, inflation, real interest rate, indirect tax).

Hd is the housing demand in Mauritius.

Hd=α0+ α1 RGDP+ α2 POP+ α3 DY+ α4 INF+ α5 RI+ α 6 IT+ εt

Factors affecting residential investment

RI=β0+ β1RGDP + β2POP+β3 UNEMPLOY +β4 R + β5 DHY + β6 INF + β7 CE + β8 CONST + β9 MS + β10 NOP + µt

The independent variable is residential investment in Mauritius (RI).

The dependent variables are:

DATA COLLECTION

The time frame for the data analysis is 1985-2011. The time series data will be accumulated from the Mauritius statistics website -National Income and Product Accounts.

Besides these, some websites like those of the International Monetary Fund (IMF), African Development Bank, World Bank will also be made use of.

TIME FRAME

5. Expected Output

The residential investment in Mauritius is expected to be quite sensitive to the real interest rate as compared to the other developed economies where the residential investment is less sensitive to the real interest rate mainly due to the diversification of the mortgage market as compared to Mauritius. Consequently the demand for housing is expected to have fallen due to a rise in the housing and property prices in the recent years with declining disposable income and weakening household balance sheet.