Common Structural Time Series Components in Inflation and Residential Property Prices

Executive Summary. This paper uses the multivariate common components model to investigate the inflation-hedging characteristics of residential property in five markets: Hong Kong, Tokyo, Singapore, Taipei and London. The results show that Singapore residential property offers perfect hedges against both short-term and permanent inflations, whereas Taipei residential property is the most effective in hedging long-term inflation. For investors who invest in residential properties in Asia and the United Kingdom, with the expectation that their investment portfolio will provide natural hedges against inflation, the results imply that they will have to adopt different timing strategies to minimize their exposure to different inflation risks in individual markets.