Macroeconomic Drivers of Property Returns

Excelling in real estate investing requires a good understanding of the macroeconomic drivers of property returns. The 2008 global financial crisis that affected property pricing and investment returns in most property markets around the globe, provides the strongest perhaps evidence of the overwhelming effect that macroeconomic variables can have on property markets and investment performance both globally and locally.

Several empirical studies have confirmed the positive effect of economic growth, best proxied by GDP, on direct real estate returns[1]. In particular, De Wit and Van Dijk (2003) present evidence indicating that higher GDP growth was statistically linked with higher office property returns in Asia, Europe, and the US over the period 1986-1999[2]. Hoskins, Higgins, and Cardew (2004) present also evidence highlighting the strong correlation between GDP growth (lagged by more than 12 months) and commercial property returns in Australia, UK, US, and Canada. Similarly, Sivitanides (2015 and 2018) verified that GDP growth was also a key factor in driving house price increases (which reflect the capital return component of residential property investment performance) in Cyprus and London. Sivitanides findings for both Cyprus and London point to a contemporaneous effect of GDP on house prices.

Other economic growth indicators that were found to influence positively real estate returns include sector-specific output growth, per capita income or per capita consumption growth, population growth, and employment growth. Ling, Marcato, and McAlister (2009), in an analysis of the dynamics of asset prices in the private commercial real estate market in the UK, validated the positive influence of sector-specific output on the capital return achieved by commercial property investments. More specifically, they found that increases in industrial output, retail sales volume and financial services output were strongly associated with increases in the capital return of industrial, retail and office properties, respectively, all else being equal.

Case and Shiller (1990) in a study of the movements in house prices in the US validated the positive impact of real per capita income and adult population growth on house price growth. Along the same lines, Ling and Naranjo (1998) verified the positive effect of growth in real per capita consumption (a variable highly correlated with real per capita income) on commercial real estate returns. Sivitanides (2018) confirmed also a strong positive effect of population growth on house price growth in London. Finally, Liang and McIntosh (1998) verified the positive short-term effect of employment growth on real estate returns.

Another important macroeconomic indicator is inflation. Hoskins, Higgins, and Cardew (2004) using data for Australia, UK, US, and Canada reported a strong positive correlation of total property returns with inflation lagged by more than 12 months, highlighting the time delays by which changes in this macroeconomic indicator influence property demand and pricing. Wurtzebach, Mueller, and Machi (1991) confirmed also the positive effect of high inflation on direct property returns. However, the authors point out that such inflation hedging effects take place only when the market is balanced in terms of demand and supply, thus highlighting the importance of selecting markets with low vacancy rates in order to achieve higher real estate returns. These findings are consistent with the results reported by the De Wit and Van Dijk (2003) study, which presents evidence indicating that higher inflation and lower vacancy rates were statistically linked with higher office property returns in Asia, Europe, and the US over the period 1986-1999. Sivitanides (1998) using data on appraisal-based returns in the US confirmed also the importance of selecting markets with lower vacancy rates in order to achieve higher office property returns. Sivitanides (1997), in another study, confirmed also that lower office vacancy rates in 22 major metropolitan office markets in the US were associated with positive office rent changes, which in essence help investors achieve higher office property returns[3]. These findings suggest that property investors should be targeting not just balanced but under-supplied property markets with very low vacancy rates in order to achieve even higher returns (Sivitanides, 2008).

Finally, a number of studies examined the effect of interest rates (another key macroeconomic indicator) on direct property returns and mostly on house prices. Ling, Marcato, and McAlister (2009) confirmed the strong negative relationship between treasury yields (interest rates) and capital returns for commercial property. In particular, their analysis indicates that decreases in treasury yields (interest rates) were strongly associated with positive capital returns, all else being equal. The underlying explanation of this effect is that decreases in interest rates, and therefore the cost of capital, contribute to increased transaction frequency and higher property prices. Along the same lines, Berlemann and Freese (2013) confirmed that increases in the Swiss key interest rate led to significant decreases in both house and flat prices. A number of other analysts, such as Giuliodori (2005), Demary (2009) and Belke, Orth, and Setzer (2008) confirmed statistically a similar relationship between interest rates and house prices. In other words, all else being equal, decreases in interest rates were found to trigger increases in house prices, and, by extension, positive capital returns.


In sum, empirical research has verified the positive effect of economic growth and key macro indicators, such as GDP, sector-specific outputs, employment, population, real per capita income or consumption, and inflation on property returns and, therefore, their positive overall contribution to property investment performance. What are the implications of these findings for property investors? Should investors enter any market in which these macroeconomic indicators are rising and are expected to continue rising? The answer is not necessarily yes. Smart and sophisticated investors should examine and other market indicators to better understand what is happening in terms of property price movements at the time of the investment decision and how they will be most likely moving over the holding period of the investment.

All the aforementioned macroeconomic indicators are primarily demand-side indicators and they don’t tell us anything about the supply side of the market at the time the investment decision is made. Growth in GDP, employment, and sector-specific outputs and even declining vacancy rates do not imply that there is no oversupply in the property market. Usually, the economic/business cycle bottoms out earlier than the property price and rent cycle due to the slow adjustments in real estate markets. So it is quite common that in the early stages of the economic recovery and growth property prices are continuing to fall, albeit at a slower rate. So in order to make smart property investments in a market in which economic growth is under way investors should first understand at what stage the economic/business cycle is and at what stage the property price/rent cycle is. Obviously, the ideal is to enter the market at the bottom of the property cycle in anticipation of continuing economic growth for at least two-three years ahead.

Taking into account that typical property holding periods range from 3-7 years, it has to be emphatically clarified that the findings of the studies discussed regarding the positive effects of key macroeconomic indicators on property returns do not necessarily imply that entering the market when economic growth has already started is the best investment strategy. This view is supported by two studies of the performance of private value-added and opportunistic funds. In particular, Shilling and Wurtzebach (2012) and Tomperi (2000) using actual property performance data, provided evidence indicating that value-added and opportunistic funds that were launched during recessionary periods achieved higher holding-period returns than funds that were launched during economic growth periods, most likely due to acquiring assets at lower prices.

From an investment strategy point of view, the findings of the research studies discussed in this article underscore the importance of obtaining the most reliable forecasts for the aforementioned macroeconomic indicators for the markets and economies that are considered for property investments. Also, they underscore the importance of continuous monitoring of these indicators along with supply and overall property market conditions. Such monitoring is necessary given the increased volatility in key macroeconomic indicators due to the globalization of the economy and financial system and the vulnerability of national economies to unpredictable and severe economic/financial shocks that may originate from anywhere in the world.


Belke, A., Orth, W. and Setzer, R. (2008). Sowing the seeds of the subprime crisis – Does global liquidity matter for housing and other asset prices? International Economics & Economic Policy, 5:4, 403–424.

Berlemann, M. and Freese, J. (2013). Monetary policy and real estate prices: a disaggregated analysis for SwitzerlandInternational Economics & Economic Policy, 10:4, 469–490.

Case, K. E. and Shiller, R. J. (1990). Forecasting Prices and Excess Returns in the Housing Market. Real Estate Economics, 18(3), 253-273.

Demary, M. (2009). The link between output, inflation, monetary policy, and housing price dynamics. MPRA Paper 15978, Munich University.

De Wit, I. and Van Dijk, R. (2003). The global determinants of direct office real estate returns. Journal of Real Estate Finance and Economics, 26(1), 27-45.

Giuliodori, M. (2005). The role of house prices in the monetary transmission mechanism across European countries. Scottish Journal of Political Economy, 52:4, 519–543.

Hoskins, N., Higgins, D., and Cardew, R. (2004). Macroeconomic Variables and Real Estate Returns: An International Comparison. The Appraisal Journal, Spring, 163-170

Liang, Y. and McIntosh, W. (1198). Employment growth and real estate return: are they linked? Journal of Real Estate Portfolio Management,  4(2), 125-133.

Ling, D. C., Marcato, G., and McAllister, P. (2009). Dynamics of asset prices and transaction activity in illiquid markets: The case of private commercial real estate. Journal of Real Estate Finance & Economics, 39(3), 359-383.

Ling, D. C. and Naranjo, A. (1998). The fundamental determinants of commercial real estate returns. Real Estate Finance, 14(4), 13-24.

Sivitanides, P. (1997). The rent adjustment process and the structural vacancy rate in the commercial real estate market. Journal of Real Estate Research, 13(2), 195-209.

Shilling, J. D. and Wurtzebach, C. H. (2012). Is value-added and opportunistic real estate investing beneficial? If so, why? Journal of Real Estate Research, 34(4), 429-461.

Sivitanides, P. (1998). Predicting office returns: 1997-2001. Real Estate Finance, 15(1), 33-42.

Sivitanides, P. (2015). Macroeconomic influences on Cyprus house prices: 2006Q1-2014Q2. Cyprus Economic Policy Review, 9(1), 3-22.

Sivitanides, P. (2018). Macroeconomic drivers of London house prices. Journal of Property Investment & Finance.

Tomperi, I. (2010). Performance of private equity real estate funds. Journal of European Real Estate Research, 3(2),96-116.

Wurtzebach, C. H., Mueller, G. R., and Machi, D. (1991). The Impact of Inflation and Vacancy on Real Estate Returns. Journal of Real Estate Research, 6(2), 153-168.


[1] Direct real estate returns refer to direct property investments on privately-traded assets, as opposed to publicly traded real estate companies or REITs.

[2] It should be noted that the capital values that were used for the calculation of office returns in this study were based on appraisals and not transaction prices, as is the case for most reported returns generated from databases that include investor property holdings.

[3] The model used to examine the effect of the vacancy rate on office rents was based on the concept of the “structural” or “normal” vacancy rate, which is considered as the vacancy rate required to allow reasonable and efficient search effort on the part of tenants looking for space and landlords looking for tenants.

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