Market Fundamentals, Risk and the Canadian Property Cycle: Implications for Property Valuation and Investment Decisions

Jim Clayton
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Jim Clayton: Department of Finance and Management Science Saint Mary's University Halifax, Nova Scotia Canada B3H 3C3, http://www.stmarys.ca/academic/commerce/finmsc/

Journal of Real Estate Research, 1996, vol. 12, issue 3, pages 347-368

Abstract: The dramatic decline in commercial property values in recent years has changed popular perception about real estate investment risk. This paper aims to generate new insights into real estate investment risk and its implications for real estate valuation. It shows that the risk premium on unsecuritized commercial real estate varies over time and is strongly related to general economic conditions. A vector autoregressive model developed to forecast real estate returns reveals that time variation in real estate risk is partly predictable, and thus can help us to forecast future movements in commercial property values. The analysis suggests that in periods surrounding major market movements, changes in commercial property prices are driven more by changes in expected (required) returns than by changes in current and expected future property income. Changing expected returns may reflect rational revisions of real estate investment risk, or alternatively investor psychology or sentiment.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1996
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