Is There a Risk Premium Puzzle in Real Estate?
Article first published online: 12 NOV 2003
Real Estate Economics
Volume 31, Issue 4, pages 501–525, December 2003
How to Cite
Shilling, J. D. (2003), Is There a Risk Premium Puzzle in Real Estate?. Real Estate Economics, 31: 501–525. doi: 10.1046/j.1080-8620.2003.00075.x
- Issue published online: 12 NOV 2003
- Article first published online: 12 NOV 2003
This paper is based on my Presidential Address to the American Real Estate and Urban Economics Association delivered at Washington, D.C., in January 2003. The paper asks whether there is a risk premium puzzle in real estate. I examine this question by reporting on an empirical investigation of real estate investors' expectations over the last 15 years. The results suggest that ex ante expected risk premiums on real estate are quite large for their risk, too large to be explained by standard economic models. Further, the results suggest that ex ante expected returns are higher than average realized equity returns over the past 15 years because realized returns have included large unexpected capital losses. The latter conclusion suggests that using historical averages to estimate the risk premium on real estate is misleading.