Abstract:
This paper explores the relationship between the Australian real estate and
equity market between 1980 and 1999. The results from this study show
three specific outcomes that extend the current literature on real estate
finance. First, it is shown that structural shifts in stock and property markets
can lead to the emergence of an unstable linear relationship between these
markets. That is, full-sample results support bi-directional Granger causality
between equity and real estate returns, whereas when sub-samples are chosen
that account for structural shifts the results generally show that changes
within stock market prices influence real estate market returns, but not vice
versa. Second, the results also indicate that non-linear causality tests show
a strong unidirectional relationship running from the stock market to the
real estate market. Finally, from this empirical evidence a trading strategy
is developed which offers superior performance when compared to adopting
a passive strategy for investing in Australian securitized property. These
results appear to have important implications for managing property assets
in the funds management industry and also for the pricing efficiency within
the Australian property market.
