Academic journal article Journal of Real Estate Portfolio Management

Political Cycles, Partisan Orientation, Gridlock, and REIT Returns

Academic journal article Journal of Real Estate Portfolio Management

Political Cycles, Partisan Orientation, Gridlock, and REIT Returns

Article excerpt

Executive Summary.

This study examines several aspects of the relationship between the presidential election cycle in the United States, political party in power, government gridlock, and real estate investment trust (REIT) excess returns. The study covers the period February 1972 through January 2007. The results indicate that REITs are significantly influenced by the political environment, and the nature of the association is more complex than often perceived. REITs provide higher excess returns: (a) under the joint condition that the Fed pursues an expansionary monetary policy and the Republican Party controls the White House, (b) during the last two years of the president's term, especially during Republican administrations, and (c) when there is political unity in the executive and legislative branches of the government.

Do political election cycles and the political party in power influence real estate market returns? There seems to be widespread anecdotal evidence that political factors impact equity market returns, and in recent years these beliefs have found varying degrees of support within the academic community.

In discussing the possible relationships between politics and capital markets, researchers postulate that governments are motivated by opportunistic and/or partisan incentives to influence the economy. Studies such as those by Lindbeck (1976), Bailey (1978), and Tufte (1978) emphasize the opportunistic incentives of policymakers. Specifically, they document that presidential administrations, regardless of their political orientation, have an incentive to stimulate economic conditions in order to enhance their likelihood of being reelected. These sentiments are echoed by Nordhaus (1975), who indicates that "there is a predictable pattern of policy, starting with relative austerity in early years and ending with the potlatch right before elections."

Furthermore, changes in the political leadership and balance of power can alter laws and policies that govern many different aspects of the economy and financial markets. Emphasizing the partisan orientation motive, Hibbs (1977) posits that the short- and long-term policy choices of governments are important determinants of economic performance. He argues that left-oriented, or liberal, parties (like the Democratic Party in the U.S.) are more likely than right-oriented, or conservative, parties (like the Republican Party in the U.S.) to pursue expansionary fiscal and monetary policies that stimulate employment because of their traditional affiliation with labor. On the other hand, right-wing parties are prone to use deflationary fiscal and monetary policies because of their putative affiliation with capital. Therefore, it is reasonable to expect that such policy differences between political parties will be reflected in financial markets.

The above line of reasoning, however, stands in contrast with Buchanan (1967), who theorizes that the outcome of political elections should have very little effect on markets. This is because, once in power, both parties have the incentive to design and implement centrist policies that appeal to the largest number of voters. Consequently, in this framework, capital market outcomes are presumed to be largely independent of political influences.1

Others, exploring a different dimension, suggest a relationship between political gridlock in the government, legislative enactments and market returns. In a two-party democratic system, such as in the U.S., governmental gridlock (or division) is defined as when the House of Representatives, the Senate, and the Presidency are not controlled by the same political party.2 Political harmony (or unity), on the other hand, is a condition that exists when both the legislative and executive branches of the government are controlled by the same party. On one side of the argument, several scholars, especially in the political science arena, suggest that a government in gridlock is less likely to pass "important," "significant," "landmark," or "conflictual" legislation (Edwards, Barrett, and Peake, 1997; Krehbiel, 1997; Coleman, 1999; and Bowling and Ferguson, 2001). …

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