Further Evidence on Real Estate Market Efficiency

Jim Clayton ()
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Jim Clayton: Department of Finance University of Cincinnati Cincinnati, Ohio 45221-0195, http://www.cba.uc.edu/dept/fin/

Journal of Real Estate Research, 1998, vol. 15, issue 1, pages 41-58

Abstract: This article investigates the extent to which condominium apartment prices in Vancouver, British Columbia are set in an efficient asset market. The empirical results provide strong evidence against market efficiency. A number of instruments, including lagged annual returns and a measure of the deviation of price from fundamental or intrinsic value, to some extent predict future returns. This suggests that a sharp run-up in house prices is due in part to irrational expectations, and thus signals a future correction as prices ultimately reflect market fundamentals. These findings have important implications for appraisals and the mortgage underwriting process. In a booming market, property may be overvalued and hence market value appraisals may exceed intrinsic or fundamental values. Given the inevitability of a market correction in the near term, a potentially useful complement to the standard valuation process would be an assessment of the likelihood of a market correction.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1998
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