Do Real Estate Prices and Stock Prices Move Together? an International Analysis

By Quan, Daniel C.; Titman, Sheridan | Real Estate Economics, Summer 1999 | Go to article overview

Do Real Estate Prices and Stock Prices Move Together? an International Analysis


Quan, Daniel C., Titman, Sheridan, Real Estate Economics


A number of authors have argued that commercial real estate offers diversification benefits to institutional investors because of its low correlation with commonly used stock price indexes. For example, using annual U.S. data from 1947 to 1982, Ibbotson and Siegel (1984) found real estate's correlation with SP stocks to be -.06, whereas Hartzell (1986), using quarterly data from 1977 to 1986, estimated the correlation to be -.25. Worzala and Vandell (1993), using the Frank Russell Index and more recent quarterly data from 1980 to 1991, estimated the correlation to be -.0971. Worzala and Vandell (1993) estimated the U.K. real estate correlation with stock returns to be .039. More recently, Fu and Ng (1997) cite a low contemporaneous correlation between a transactions-based real estate index and stocks for Hong Kong over the period 1980 to 1996. Eichholtz and Hartzell (1996) document correlations of -.10, -.08 and -.09 for Canada, the U.K. and the U.S. between property and stock indexes(1).

The low correlation between real estate and stock price indexes is somewhat surprising, given that both are affected by the level of economic activity and interest rates. However, other factors can reduce the correlation between the two time series. For example, stock prices may increase because of increased investment opportunities in an economy's corporate sector. This increase in investment opportunities could in turn lead to increases in real interest rates, which could reduce the value of commercial buildings even if their rental prices increase. Changes in the cost of labor could also induce a negative relation between stock prices and commercial real estate values. For example, foreign competition may lead to decreases in domestic wage rates, which in turn lead to increased corporate profits and higher stock prices. However, if wage rates in the building sector also decrease, then construction costs decline, and the value of commercial real estate will fall. Hence, changing labor costs can lead to negative correlations between commercial real estate values and stock prices.

Real estate will indeed provide substantial diversification benefits for pension funds and other institutions if the low correlations between real estate and stock price indexes arise because the values of these capital assets react very differently to economic factors. However, the low observed correlation could alternatively be an artifact of the data. Because real estate trades infrequently, researchers must rely on indexes based on appraisals or inferred prices. Due to the nature of this inferring process, such indexes are often smoothed and thus underestimate the true volatility of the commercial real estate time series as well as the covariance between real estate price changes and stock returns. Hence, commercial real estate may provide less diversification benefit than would be indicated by a naive interpretation of the data.

This paper provides new evidence on the relation between stock returns and real estate price changes by analyzing real estate price indexes, stock prices and macroeconomic data from 17 countries. These countries include most of the world's largest industrialized economies as well as some of the smaller economies in Asia's emerging markets.

In contrast to earlier studies, we find a significant positive relation between stock returns and changes in commercial real estate values. After establishing this relation, we estimate additional regressions that provide some insights into why these two return series are correlated. One hypothesis is that real estate and stock prices are both driven up and down by changing expectations (either rational or irrational) of future economic growth that is independent of current fundamentals, like current rents and GDP. For example, in Japan, people often refer to the "bubble economy" in the mid-1980s which was characterized by real estate and stock prices being bid up to levels that could not be sustained. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Do Real Estate Prices and Stock Prices Move Together? an International Analysis
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.