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Rational Predictability of Real Estate Prices

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  • Jiro Yoshida

    (Faculty of Economics, The University of Tokyo)

Abstract

Serial correlations in asset prices are often associated with irrational investment decisions (e.g., speculative bubbles) or inefficient markets. This paper shows that even asset prices determined rationally in an efficient market become predictable if underlying cash flows contain predictable components. In particular, I show that cash flows from real estate tend to contain a predictable "overshooting" component, due to slow adjustments in asset supply. Such predictable cash flows result in overshooting prices of real estate. Even though rational capitalization rates counteract the overshooting, the property price still exhibits predictability. The analysis indicates that the rational benchmark price must be carefully modeled when one tests irrationality or inefficiency in asset prices.

Suggested Citation

  • Jiro Yoshida, 2008. "Rational Predictability of Real Estate Prices," CARF J-Series CARF-J-046, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:jseres:cj046
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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/jseries/47.pdf
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    Cited by:

    1. Minye Zhang & Yongheng Deng, 2010. "Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?," The Journal of Real Estate Finance and Economics, Springer, vol. 40(4), pages 497-543, May.

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