Periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price 'bubbles'. The general case for bubbles is that asset prices simply move too much given the future cash flows the assets are reasonably likely to produce. A corollary for property is that observed mean reversion in real cash flows is not reflected in investor valuations, resulting in asset values being too high when real cash flows are high and vice versa. This paper summarises some evidence on large corporate equity and commercial property price movements and present arguments for and against the existence of irrational bubbles.
Get full access to this article
View all access options for this article.
References
1.
Ambrose, B., Hendershott, P.H. and Klosek, M. (2002) Pricing upward-only adjusting leases, Journal of Real Estate andFinance, 25, pp. 33-49.
2.
Balduzzi, P. and Kallal, H. (1997) Risk premia and variance bounds, Journal of Finance, 52, pp.1913-1949.
3.
Barsky, R. and Delong, B. (1992) Why does the stock market fluctuate?, Quarterly Journal of Economics, 107, pp. 291-311.
4.
Bjorklund, K. and Soderberg, B. (1999) Property cycles, speculative bubbles and the gross income multiplier, Journal of Real Estate Research, 18, pp. 151-174.
5.
Brooks, C., Katsaris, A., McGough, T. and Tsolacos, S. (2001) Testing for bubbles in indirect property price cycles, Journal of Property Research, 18, pp. 341-356.
6.
Brown, S. J. and Liu, C. H. (Eds) (2001) A Global Perspective on Real Estate Cycles. Boston, MA: Kluwer Academic Publishers.
7.
Browne, L.E. and Rosengren, E.S. (1992) Real estate and the credit crunch: an overview , in: L. E. Browne and E. S. Rosen (Eds) Real Estate and the Credit Crunch, pp. 1-17. Conference Series No. 36, Federal Reserve Bank of Boston MA.
8.
Brunnermeier, M.K. (2001) Asset Pricing under Asymmetric Information. Oxford: Oxford University Press.
9.
Garber, P.M. (2000) Famous First Bubbles: The Fundamentals of Early Manias. Cambridge, MA: MIT Press .
10.
Hall, R.E. (2001) Struggling to understand the stock market, The American Economic Review, 91, pp. 1-11.
11.
Hendershott, P.H. (1996) Rental adjustment and valuation in overbuilt markets: evidence from the Sydney office market, Journal of Urban Economics , 39, pp. 51-67.
12.
Hendershott, P.H. (2000) Property asset bubbles: evidence from the Sydney office market, Journal of Real Estate Finance andEconomics , 20, pp. 67-81.
13.
Hendershott, P.H. and Kane, E.J. (1992) Causes and consequences of the 1980s commercial construction boom, Journal of Applied Corporate Finance, 5, pp. 61-70.
14.
Hendershott, P.H. and Macgregor, B.D. (2002) Explaining UK office and retail capitalisation rates using an error correction model. Working paper.
15.
Hendershott, P.H. and Ward, C.R.W. (2003) Valuing and pricing retail leases with renewal and overage options, Journal of Real Estate Finance and Economics (forthcoming).
16.
Hendershott, P.H., Lizieri, C. and Matysiak, G. (1999) Workings of the London Office market, Real Estate Economics, 27, pp. 365-387.
17.
Higgens, M. and Osler, C. (1999) Asset market hangover and economic growth: the OECD during 1984-93, Oxford Review of Economic Policy, 13, pp. 110-134.
18.
Kindleburger, C. (2000) Manias, Panics, and Crashes, 4th edn. New York: John P. Wiley & Sons, Inc.
19.
Kleidon, A. (1986) Variance bounds tests and stock price valuation models, Journal of Political Economy, 94, pp. 953-1001.
20.
Leroy, S. and Porter, R. (1981) The present-value relation: tests based on implied variance bounds, Econometrica, 49, pp. 555-574.
21.
Marsh, T. and Merton, R. (1986) Dividend variability and variance bounds tests for the rationality of stock market prices, American Economic Review, 76, pp. 483-498.
22.
Nordhaus, W.D. (2002) The Alchemist fallacy and the new economy. NBER Summer Institute.
23.
Renaud, B. (1997) The 1985 to 1994 global real estate cycle: an overview , Journal of Real Estate Literature, 5, pp. 13-44.
24.
Renaud, B., Zhang, M. and Koeberle, S. (2001) Real estate and the Asian crises: lessons of the Thailand experience, in: S. J. Brown and C. H. Liu (Eds) A Global Perspective on Real Estate Cycles, pp. 25-62. Boston, MA: Kluwer Academic Publishers.
25.
Schleifer, A. and Summers, L.H. (1990) The noise trader approach to finance, Journal of Economic Perspectives, 4, pp. 19-33.
26.
Scott, L.O. (1990) Do prices reflect market fundamentals in real estate markets?, Journal of Real Estate Finance andEconomics, 3, pp. 5-23.
27.
Shiller, R. (1981) Do stock prices move too much to be justified by subsequent changes in dividends ?, American Economic Review , 71, pp.421-436.
28.
Shiller, R. (1999) Market Volatility. Cambridge, MA: MIT Press.
29.
Shiller, R. (2000) Irrational Exuberances. Princeton, NJ: Princeton University Press.
30.
Sivitanides, P., Southard, J., Torto, R.G. and Wheaton, W.C. (2001) The determinants of appraisal-based capitalization rates, Real EstateFinance, 18, pp. 27-37.
31.
Treynor, J. (2002) The canonical market bubble. Working paper.
32.
Wheaton, W.C., Torto, R.G., Sivitanides, R.S. Etal (2001) Real estate risk: a forward-looking approach, Real EstateFinance, 18, pp. 20-28.
33.
Wheaton, W.C. and Torto, R.G. (1994) Office market rent indices and their behavior over time, Journal of Urban Economics, 35, pp. 121-139.
