Real estate is an inherent illiquid asset class compared to, for example, stocks and bonds. Especially during the Global Financial Crisis (GFC) the importance of (the lack of) market liquidity became clear. Prices fell tremendously, but maybe even more importantly, investors and households were not able to sell their assets as quickly as desired. For investors, lower liquidity of their investment portfolio means that it is more difficult to rebalance their portfolio. For households, lower liquidity implies that they are not able to move if desired, which has consequences for labor mobility as well.
Prices and liquidity move together
The goal of this article is to present liquidity indices for Amsterdam, intuitively explain the models, and to provide some stylized empirical facts. This article estimates two different empirical liquidity measures for the residential real estate market in Amsterdam. One measure focuses on the first dimension of liquidity (market tightness) and one measure focuses on the fifth dimension (immediacy). The results further include a discussion on the commonality between these measures and the co-movement with prices. The results indicate that the two measures – based on different data – are very similar and both show a strong decrease in market liquidity during the GFC. In the recent years, market liquidity recovered to pre-crisis levels.
Author: Dorinth van Dijk