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Corporate Equity and Commercial Property Market 'Bubbles'

Aberdeen University Business School, Old Aberdeen, Scotland, UK, phh3939{at}uslink.net

Robert J. Hendershott

Finance Department, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053, USA, rhendershott{at}scu.edu

Charles R. W. Ward

Department of Real Estate and Planning, School of Business, University of Reading, Reading, RG6 6AW, UK, Ward{at}reading.ac.uk

Periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price 'bubbles'. The general case for bubbles is that asset prices simply move too much given the future cash flows the assets are reasonably likely to produce. A corollary for property is that observed mean reversion in real cash flows is not reflected in investor valuations, resulting in asset values being too high when real cash flows are high and vice versa. This paper summarises some evidence on large corporate equity and commercial property price movements and present arguments for and against the existence of irrational bubbles.

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