Response speeds of direct and securitized real estate to shocks in the fundamentals

The generalized impulse responses up to 12 quarters from the shock are exhibited in Figures
2-5. In all the figures, the impulse responses correspond to reactions to shocks that are one
standard error in magnitude. Therefore, the estimated responses show the economic
significance of the shocks, while the confidence intervals are included in the graphs to
examine the statistical significance of the responses. That is, the impulse responses
essentially summarize the dynamics of the models. Note that the Hansen stability test accepts
the stability of the estimated parameters and the CUSUM test does not detect any structural
breaks in the models.

[Fig. 2-5 here]

The estimated reactions generally look sensible and have the expected signs. The
responses that have an unexpected sign - mainly some positive responses to interest rate and
inflation rate shocks - are statistically insignificant with the exception of the ind tbi and
re_tbi reactions to a shock inIR and of the apt_tbi reaction to an inflation shock. A priori, we
would expect an inflation shock to have a negative short-term influence on current real
property prices since rental prices typically adjust only sluggishly to changes in the general
price level while the impact of inflation on the discount factor is typically somewhat faster
and positive. While the empirical literature presents mixed results regarding the inflation
hedging qualities of direct real estate, empirical evidence has generally suggested that
securitized real estate does not provide a hedge against inflation (see Hoesli et al., 2008, for a
review of the inflation hedging literature). Based on our estimations, however, the hypothesis
that both direct and securitized real estate investments work as a hedge against unexpected
changes in the inflation rate cannot be rejected. In fact, it appears that an inflation shock may
induce higher real returns in the direct apartment market. That is, unexpectedly high inflation

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