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Book part
Publication date: 16 August 2021

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Intercultural Management in Practice
Type: Book
ISBN: 978-1-83982-827-0

Open Access
Article
Publication date: 3 August 2021

Matt Larriva and Peter Linneman

Establishing the strength of a novel variable–mortgage debt as a fraction of US gross domestic product (GDP)–on forecasting capitalisation rates in both the US office and…

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Abstract

Purpose

Establishing the strength of a novel variable–mortgage debt as a fraction of US gross domestic product (GDP)–on forecasting capitalisation rates in both the US office and multifamily sectors.

Design/methodology/approach

The authors specify a vector error correction model (VECM) to the data. VECM are used to address the nonstationarity issues of financial variables while maintaining the information embedded in the levels of the data, as opposed to their differences. The cap rate series used are from Green Street Advisors and represent transaction cap rates which avoids the problem of artificial smoothness found in appraisal-based cap rates.

Findings

Using a VECM specified with the novel variable, unemployment and past cap rates contains enough information to produce more robust forecasts than the traditional variables (return expectations and risk premiums). The method is robust both in and out of sample.

Practical implications

This has direct implications for governmental policy, offering a path to real estate price stability and growth through mortgage access–functions largely influenced by the Fed and the quasi-federal agencies Fannie Mae and Freddie Mac. It also offers a timely alternative to interest rate-based forecasting models, which are likely to be less useful as interest rates are to be held low for the foreseeable future.

Originality/value

This study offers a new and highly explanatory variable to the literature while being among the only to model either (1) transactional cap rates (versus appraisal) (2) out-of-sample data (versus in-sample) (3) without the use of the traditional variables thought to be integral to cap rate modelling (return expectations and risk premiums).

Details

Journal of Property Investment & Finance, vol. 40 no. 2
Type: Research Article
ISSN: 1463-578X

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