Evidence on Rationality in Commercial Property Markets: An Interpretation and Critique

Authors: Patric H. Hendershott, Robert J. Hendershott and Bryan D. MacGregor

Start Page: 147
End Page: 172
Volume: 14
Issue Number: 2
Year: 2006
Publication: Journal of Real Estate Literature

Abstract: Periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price bubbles. The general case for irrationality is that real asset prices simply have moved too much given the future real cash flows the assets are reasonably likely to produce. A specific argument for property is that observed mean reversion in real cash flows has not been reflected in investor valuations, resulting in asset values being too high when real cash flows were high and vice versa. This study interprets, critiques and extends existing analyses of movements in real commercial property prices during the late 1980s and early 1990s.