Irreversibility,Uncertainty and Housing Investment

Housing represents a form of “irreversible” investment. Theoretically, increased uncertainty should lower housing investment. Empirically, finding a proxy for uncertainty has proven problematic. Some recent papers have investigated the effect of uncertainty on real estate investment, with varying proxies for uncertainty and mixed results. This paper employs a technique used in modern macroeconomic studies, the Generalized Autoregressive Conditional Heteroskedasticity-in-Mean model, which has been shown to correspond as closely as any known measure to theoretical concepts of uncertainty. Results indicate that uncertainty indeed has a negative impact on housing starts.