Stationarity and Co-Integration in Systems with Three National Real Estate Indices

Abstract

This study examines the stochastic properties of the commercial real estate wealth indices for three countries (the U.S., Canada, and the U.K.) and for several property types (aggregate, office, retail, and industrial). Each of the indices is tested for a unit root and all series are found to be nonstationary. Furthermore, all indices also indicate the presence of both drift and trend. The results are strongest when the indices are tested in real estate and exchange rate-adjusted form. Application of Johansen's model indicates that the system for the three countries shows evidence of co-integration for the aggregate, retail, office, and industrial properties. Again, the evidence is the strongest when the indices are tested in real and exchange rate-adjusted form. Hence, it is conceivable that inflationary expectations may be the factor that provides the common linkage between commercial real estate across national boundaries.