The Inflation-Hedging Ability of Canadian Direct Real Estate Return and its Components, Income, and Appreciation

Abstract

Executive Summary.This paper examines the inflation hedging characteristics of Canadian private real estate between 1973 and 2007. In the short term, total and appreciation returns are a complete hedge against inflation, expected and unexpected inflation, and remain a complete hedge after the introduction of macroeconomic variables increasing materially the explanatory power of regression models. Cointegration tests show a positive long-term relationship between inflation and total return, as well as appreciation return. Appreciation return is thus identified as the true inflation-hedging source for Canadian real estate. Granger causality tests reveal causality from total and appreciation returns to inflation. Therefore, total and appreciation returns may help forecast future inflation rates.