Firming Property Prices and Weak Cash Flows

Abstract

Firming property prices in recession and early recovery are consistent with investors expecting income weakness to be temporary. The authors argue that these expectations are supported by anticipated restraint in new construction, restraint that has been in place since the mid-1990s and contrasts sharply with overbuilding that characterized the 1980s. Firm property prices and weak cash flows in the economic downturn since 2001 have resulted in falling cap rates (gross property yields) according to the authors. This pattern represents a profound shift from undisciplined markets of 1980–1995, when cap rates generally declined in expansion (1983–1990) and rose sharply (1990–1995) in retrenching real estate markets.