1. Residential Investment and Interest Rate: A Nonlinear Analysis Zan Yang Institute of Real Estate Studies Tsinghua University ， Beijing

2. Contents of the presentation Theoretical Background Relevant Studies Methodology Empirical Results and Conclusion

3. Theoretical Background No option is considered –Negative relationship between interest rate and investment Option is considered –Investment or delay investment –Nonlinear relationship between interest rate and investment Investing value Option value

4. Previous Studies Chetty (2007): retime investment in response to changes in market conditions Alvarez and Koskela (2006): relative level of interest rate to the long – run steady state interest rate Beccarini (2007): level of interest rate volatility Capozza and Li (2001): growth rate of rents

5. Markov Switching Error Correction Model (MS-ECM)

6. MS(2)-VECM for Housing Investment ST - housing starts HP- housing price IR – interest rate CC-construction cost

7. Cointegration test and Nonlinear test For ECM: Ramsey’s RESET test ARCH test Nonlinear ECM Log(ST)=0.50log(IR)+4.86log(HP)-10.17log(CC)+14.24 (2.75) (6.67) (-7.12) (6.58)

9. Smoothed probabilities in regime 1 and 2

11. Thanks ! Zan Yang