Predicting behaviour in Australian securitised property markets

Patrick Wilson, John Okunev and Tiffany Hutcheson ()

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: The manner in which property market participants alter their pattern of activity under different economic climates is a matter of considerable interest to professionals and academics. Changing patterns of investment returns above the risk free rate (i.e. the risk premium) might provide some clues as to this market behaviour. If this is true then there are two important questions to be considered: (i) what is an appropriate value of the market risk premium in Australian property markets and, (ii) how can the risk premium be modelled so as to provide useful information on the behaviour of Australian securitised property markets? To deal with the first issue, estimating the risk premium, this paper models the ex ante risk premium implied from the information contained in the price of Listed Property Trust shares traded on the Australian stock exchange. To consider the second issue, a normal (Gaussian) distribution is explored for both risk premium and market price. Under the assumption of a normal distribution, the standard deviation of the risk premium and priceseriesare analysed to determine whether there is useful information to predict market behaviour.The general findings of the paper are: risk premium vary widely under differing economic climates; the long term risk premium in Australian securitised property is about six and a half percent; and a simple normalisation methodology when applied to market price provides information that may be used to predict property market behaviour.

Pages: 4 pages
Date: 2003-01-01
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Published as: Wilson, P.J., Okunev, J. and Hutcheson, T.J., 2003, "Predicting behaviour in Australian securitised property markets", Australian Property Journal, 37(8), 574-577.

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