No, it doesnβt, despite the general perception that illiquidity matters in real estates. As expected, the illiquidity costs we estimate for the US residential properties are large. They are on average equivalent to 12% of the total property returns, ranging from 9.5% to 29.5% of property prices depending on illiquidity levels and market conditions. However, when amortized by holding periods, monthly illiquidity costs are on average 0.08%, and illiquidity risk does not appear to be priced in residential properties: illiquid properties do not show higher returns than liquid properties. On the contrary, we find evidence of flight-to-quality in bull markets: i.e., high quality illiquid properties are preferred to low quality liquid properties in buoyant markets. These results are in sharp contrast with those in equities and bonds where flight-to-liquidity has been reported when markets are in stress
