The cyclical variation in office construction, vacancies, rents, and values over the last decade has been enormous throughout the world. Reasons advanced for this enormity include prolifigate lenders, egotistical developers, and even rational behavior in the face of uncertainly and long construction periods. Our analysis of the Sydney office market suggests a fourth contributing factor: the failure of investors to understand the workings of property markets. Given the incentives of developers to build when value rises substantially above replacement cost and not to build when value is low relative to replacement cost, the property market has to be mean reverting. We provide direct evidence that Sydney investors did not incorporate mean reversion into their vacancy rate forecasts at the cyclical trough and as a result under valued properties. We provide indirect evidence that mean reversion of cash flows was not incorporated at the cyclical peak and that this triggered excessive construction and vacancies. That is, the Sydney office market in the late 1980s is another example of “excess price volatility” or an asset price bubble.
The Journal of Real Estate Finance and Economics – Springer Journals
Published: Oct 16, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
All the latest content is available, no embargo periods.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud