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"Oft Expectation Fails": A Time-Series Analysis of Construction Starts in the London Office Market


Author Info

  • Franz Fuerst

    (School of Real Estate & Planning, Henley Business School, University of Reading)

  • Anna-Maija Grandy



Expectations of future market conditions are generally acknowledged to be crucial for the development decision and hence for shaping the built environment. This empirical study of the Central London office market from 1987 to 2009 tests for evidence of adaptive and naive expectations. Applying VAR models and a recursive OLS regression with one-step forecasts, we find evidence of adaptive and naïve, rather than rational expectations of developers. Although the magnitude of the errors and the length of time lags vary over time and development cycles, the results confirm that developers’ decisions are explained to a large extent by contemporaneous and past conditions in both London submarkets. The corollary of this finding is that developers may be able to generate excess profits by exploiting market inefficiencies but this may be hindered in practice by the long periods necessary for planning and construction of the asset. More generally, the results of this study suggest that real estate cycles are largely generated endogenously rather than being the result of unexpected exogenous shocks.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2010-13.

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Handle: RePEc:rdg:repxwp:rep-wp2010-13

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Related research

Keywords: Development Cycles; Rational expectations; Adaptive Behaviour;


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  1. Stephen Malpezzi & Susan M. Wachter, . "The Role of Speculation in Real Estate Cycles," Zell/Lurie Center Working Papers 401, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  2. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1653-79, December.
  3. R Barras, 1983. "A simple theoretical model of the office-development cycle," Environment and Planning A, Pion Ltd, London, vol. 15(10), pages 1381-1394, October.
  4. Tony McGough & Sotiris Tsolacos, 1999. "Interactions within the Office Market Cycle in Great Britain," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 18(1), pages 219-232.
  5. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Grenadier, Steven R, 1995. "The Persistence of Real Estate Cycles," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 10(2), pages 95-119, March.
  7. Patric H. Hendershott & Bryan D. MacGregor & Raymond Y.C. Tse, 2002. "Estimation of the Rental Adjustment Process," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 165-183.
  8. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
  9. William C. Wheaton, 1999. "Real Estate "Cycles": Some Fundamentals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 209-230.
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