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Inflation Illusion, Expertise and Commercial Real Estate

Author

Listed:
  • William G. Hardin

    (Florida International University)

  • Xiaoquan Jiang

    (Florida International University)

  • Zhonghua Wu

    (Florida International University)

Abstract

Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) provide a unique setting to examine the inflation illusion hypothesis. NCREIF provides appraisal-based and transaction-based return series allowing comparison of market participants with specific valuation expertise to general market participants. Results using the appraisal-based indices indicate that the mispricing term is not statistically significantly related to expected inflation, which suggests that commercial valuers do not suffer from inflation illusion. Interestingly, results based on the investor oriented transaction-based indices show that the mispricing term is inversely related to expected inflation and that mispricing plays an important role in determining the long-term discount rate. These results are robust across different empirical specifications, inflation data and subsamples by property type. The comprehensive findings suggest that the inflation illusion effect in direct investment in real estate differs from securitized markets. This study further adds to the general literature regarding the impact of inflation illusion on asset markets by showing that experienced participants may not suffer from inflation illusion which suggests that 1) novice participants may be driving its appearance and 2) experience and training mitigate this bias.

Suggested Citation

  • William G. Hardin & Xiaoquan Jiang & Zhonghua Wu, 2017. "Inflation Illusion, Expertise and Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 55(3), pages 345-369, October.
    • Handle: RePEc:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9587-7
    DOI: 10.1007/s11146-016-9587-7
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    2. Zifeng Feng, 2022. "How Does Local Economy Affect Commercial Property Performance?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 361-383, October.

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