The Dynamics of Appraisal Smoothing

Abstract

We investigate the dynamics of appraisal smoothing in the National Council of Real Estate Investment Fiduciaries (NCREIF) index return using time‐varying asset pricing models. We find that smoothing is on average close to zero but varies substantially over time. From the inception of the NCREIF index in 1978 until the mid‐1990s, there was little evidence of smoothing. Smoothing has increased significantly since the mid‐1990s to the end of 2010. Smoothing increases when property prices or uncertainty increases. However, it decreases when sentiment in the property market is high or during recession periods. The substantial variation in the level of smoothing indicates that the volatility of unsmoothed appraisal‐based property returns would be significantly over‐ or under‐estimated for different periods if unsmoothed with a long‐run average smoothing.

Does illiquidity matter in residential properties?

“…As suggested by many previous empirical studies, property returns are likely to be affected by other factors, in particular, macroeconomic variables (Ling and Naranjo, 1997;Cho, Hwang, and Lee, 2014). In this study, we use several macroeconomic variables that affect residential property prices in addition to the market return.…”

“…The rent-price ratio of Davis, Lehnert, and Martin (2008) is used for dwelling benefits because it can be interpreted as the price of the dwelling benefits agreed upon between landlords and the tenants in the residential property market. To test the robustness of our results, we also use sentiment indices for buying and selling houses as well as for various other macroeconomic variables, following Ling and Naranjo (1997) and Cho, Hwang, and Lee (2014).…”

Does Illiquidity Matter in Residential Properties?

“…Although the decomposition of beta provides useful insight into illiquidity risks in pricing residential properties, the results might be affected by the quality of the properties, because our liquid and illiquid portfolios can also be interpreted as low and high quality properties, respectively. Moreover, the beta is likely to change over time depending on the macroeconomic variables (Ferson and Harvey, 1993;Petkova and Zhang, 2005;Ang and Chen, 2007;Cho, Hwang, and Lee, 2014). In this section, we analyse how residential property prices react to illiquidity in the presence of various control variables, which can explain property prices.…”

13ª Conferência Internacional da LARES

“…For instance, landlords usually provide discounts and other incentives to tenants in recessionary periods instead of lowering asking rents. Cho et al (2014) use time-varying asset pricing models to find that appraisal smoothing is on average close to zero, but changes substantially overtime.…”