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Real Estate Returns and Inflation: An Added Variable Approach

This study analyses the inflation hedging effectiveness of residential real estate over the 1969-94 period. The results indicate that residential real estate is a significant hedge against both expected and unexpected inflation. These results indicate that since financial assets are not good inflation hedges in periods of high unexpected inflation, including real estate in a portfolio should decrease the variance of the portfolio returns. These results were made possible by the use of the Added Variable Regression Method (AVRM), a measure which has yet to be employed in this context. There are nine variables included in the AVRM framework which are also found to have significant explanatory power relative to residential real estate returns.

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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 15 (1998)
Issue (Month): 3 ()
Pages: 327-338

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Handle: RePEc:jre:issued:v:15:n:3:1998:p:327-338
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Web: http://pages.jh.edu/jrer/about/get.htm Email:


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  1. Paul H. Goebel & Kee S. Kim, 1989. "Performance Evaluation of Finite-Life Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 4(2), pages 57-70.
  2. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
  3. John M. Clapp & Carmelo Giaccotto & Dogan Tirtiroglu, 1991. "Housing Price Indices Based on All Transactions Compared to Repeat Subsamples," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 270-285.
  4. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
  5. K.C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," NBER Working Papers 3311, National Bureau of Economic Research, Inc.
  6. Jack H. Rubens & Michael T. Bond & James R. Webb, 1989. "The Inflation-Hedging Effectiveness of Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 4(2), pages 45-56.
  7. Fogler, H Russell & Granito, Michael R & Smith, Laurence R, 1985. " A Theoretical Analysis of Real Estate Returns," Journal of Finance, American Finance Association, vol. 40(3), pages 711-19, July.
  8. Liu, Crocker H & Mei, Jianping, 1992. "The Predictability of Returns on Equity REITs and Their Co-movement with Other Assets," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 401-18, December.
  9. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-64, December.
  10. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
  11. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  12. Donald R. Haurin & Patric H. Hendershott, 1991. "House Price Indexes: Issues and Results," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 259-269.
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