InflationandRealEstateReturns20080110.pdf

Real Interest Rates, Expected Inflation, and Real Estate Returns: A Comparison of the U.S. and Canada by Kuntara Pukthuanthong-Le and Richard Roll January 9, 2008 Abstract In the United States, but not in Canada, nominal interest on residential housing mortgages is a deductible expense for the personal income tax. This suggests that changes in nominal interest rates could conceivably have differing impacts on real estate values in the two countries. The inflation component of nominal interest should have a negative impact on Canadian real estate, but its effect should be strictly less negative in the US and could even be positive. Using real estate investment trusts along with expected inflation imputed from inflation-indexed bonds in both countries, we find empirical support for a material and significant difference. In Canada, increases in nominal interest rates driven by inflation have a negative impact. The US impact is minimal and ambiguous in sign. Authors’ Coordinates Pukthuanthong-Le Roll Department of Finance UCLA Anderson Address San Diego State University San 110 Westwood Plaza Diego, CA 92182 Los Angeles, CA 90095 Voice (619) 594-5690 (310) 825-6118 E-Mail kpukthua@ rroll@A Acknowledgement We have benefited greatly fro