ON THE REAL-ESTATE MARKET-EFFICIENCY

This reseach reexamines the efficiency hypothesis of the real estate m arket using monthly data and the vector autoregressive (VAR) modelling technique. The tests focus on the causal linkage between real estate returns and a number of relevant financial and economic variables. An eight-by-eight VAR model is estimated using the FPE and the specific g ravity criteria, in conjunction with an extensive series of specificat ion tests. The empirical results distilled from system estimations sug gest that the real estate market is efficient with respect to availabl e information on the industrial production, the risk premia, the term structure of interest rates, and the monetary base. Movements in these variables are quickly and fully utilized by market agents, perhaps ow ing to the intensity with which their relationship with stock returns has been discussed in the literature and the popular media. However, t he results also suggest the presence of a significant lagged relations hip between real estate returns and fiscal policy moves, even when the paths through other potential determinants of these returns are taken into account. Of course, our finding that the fiscal policy measure i s useful in predicting stock returns does not necessarily imply that t he real estate market is inefficient. At a minimum, inefficiency is re vealed only if a careful analysis of the budgetary process can help de sign a profitable (exploitable) trading strategy.