Real Estate Returns and Inflation: An Added Variable Approach

This study analyses the inflation hedging effectiveness of residential real estate over the 1969-94 period. The results indicate that residential real estate is a significant hedge against both expected and unexpected inflation. These results indicate that since financial assets are not good inflation hedges in periods of high unexpected inflation, including real estate in a portfolio should decrease the variance of the portfolio returns. These results were made possible by the use of the Added Variable Regression Method (AVRM), a measure which has yet to be employed in this context. There are nine variables included in the AVRM framework which are also found to have significant explanatory power relative to residential real estate returns.