Macroeconomic Theory and The Implication for Real Estate Cycles
The paper examines the implication of macroeconomic theory on real estate cycles. Certain macroeconomic factors such as increasing real interest rates, lack of credit availability and increasing product market competition as a result of higher rate of returns in the financial markets tend to dissuade real estate investments while favouring short term investors. It has been established that macroeconomic variables such as nominal interest rates explain almost 60% of the variation in real estate prices. Other macroeconomic variables such as the slope of the term structure, expected and unexpected inflation, industrial production, and the spread between high-grade and lowgrade bonds act as a proxy for economic risk factors that are rewarded, ex ante, in the stock market. Hence a good understanding of macroeconomic theory and cyclical movement is a significant factor for efficient portfolio management and the resultant implication on investment decision making.
