Government's Real Estate Interventions and the Stock Market

We study the investment choices of institutional investors in response to the governments' interventions in the real estate market. We find that mutual funds decreased their ownership in equities during the intervention months with no short-term reversal. This behavior is more observed among active mutual funds, especially those investing in the local assets. Interestingly, we find that these investors increased their ownership in the financial sector stocks without significant changes to their real estate equity holdings. Our results suggest that the interventions affecting the riskiness of the financial stocks were more effective than the ones focused on the real estate returns. Our results are based on a "quasi-natural experiment'' provided by a surprise announcement of foreign buyer tax and lending stress tests in Canada, which were introduced following the rapid increase in housing prices in major Canadian cities.