The Journal of Real Estate Finance and Economics
Volume 20, Issue 1, Article 5 (Abstract)
Title:	Property Asset Bubbles: Evidence from the Sydney Office Market
Author:	Patric H. Hendershott
Abstract:	The cyclical variation in office construction, vacancies, rents and values over the last decade has been enormous throughout the world. Reasons advanced for this enormity include prolifigate lenders, egotistical developers, and even rational behavior in the face of uncertainty and long construction periods. Our analysis of the Sydney office market suggests a fourth contributing factor: the failure of investors to understand the workings of property markets. Given the incentives of developers to build when value rises substantially above replacement cost and not to build when value is low relative to replacement cost, teh property market has to be mean reverting. We provide direct evidence that Sydney investors did not incorporate mean reversion into their facancy rate forecasts at the cyclical trough and as a result under valued properties. We provide indirect evidence that mean reversion of cash flows was not incorporated at the cyclical peak and that this triggered excessive construction and vacancies. That is, the Sydney office market in the late 1980s is another example of "excess price volatility" or an asset price bubble.
Keywords:	mean reversion, valuation, cycles