A present value approach to analysing residential property
We adopt a simple Present Value (PV) methodology to investigate the interaction betweeninterest rates, inflation and taxation on the fundamental value of residential real estate fora rational investor with varying degrees of risk-aversion. This approach allows thecalculation of the fair present value of residential real estate from only a small number ofmacro-economic variables, and avoids the need to use historical data to calibrate amodel. A PV approach can explain some of the more perplexing results obtained in priorwork on residential real estate, such as the inability to consistently find a strong negativecorrelation between property prices and interest rates. Actual property prices are broadlysupported by underlying fundamental value (as determined by our PV model) prior to themid 90s. Our model suggests that the global policy shift to independent central banks withinflation-targeting mandates has important implications for property values.
|Year of publication:||
|Authors:||Rickwood Peter ; Karantonis Angelo|
Pacific Rim Real Estate Society
|Type of publication:||Other|
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