Mortgage Fund Flows, Capital Appreciation, and Real Estate Cycles


This paper provides strong evidence for a positive feedback loop between property prices and mortgage supply, using data from the U.S. commercial property and mortgage markets over the 1991 to 2011 period. The empirical analyses control for the endogeneity of property prices, mortgage flows, mortgage interest rates, and loan to value ratios, and provide two main findings. First, exogenous increases in mortgage supply, measured with the growth of the CMBS market, significantly reduce property cap rates. Second, volatility of past price changes and the “biggest loss” in property values in the past significantly affect mortgage supply. This positive feedback loop may be an important driving force for real estate cycles.

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  1. 1.

    See, e.g., Miller et al. (2011a, b) for evidence of the economic impact of the housing market.

  2. 2.

    See for example the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, the NCREIF Transaction-Based Index (NTBI), or the Moody’s/REAL Commercial Property Price Index (CPPI).

  3. 3.

    See, e.g., Emerging Trends in Real Estate 1998 published by Equitable Real Estate and Yarmouth pension fund advisory groups.

  4. 4.

    Pyhrr et al. (1999) review the large literature on real estate cycles.

  5. 5.

    See Pavlov and Wachter (2006) and others for theories that predict “underpricing” of mortgages due to competition among lenders.

  6. 6.

    Clayton (2003) reviews much of this literature with a focus on the implications for private real estate.

  7. 7.

    16 past quarters are also studied. Due to the large time window, the estimated Jensen’s alpha has little variation from quarter to quarter, and thus has little power for testing our hypotheses. The results still have the right signs, but are no longer significant.


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We thank Shaun Bond, Charles Leung, Thomas Thibodeau, and participants of the 2009 AREUEA international conference, the 2009 ReCapNet conference, and the 2010 AREUEA midyear conference for constructive comments. We are particularly grateful to the editor and a referee whose comments and suggestions greatly improved the paper. All errors are ours.

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Correspondence to Liang Peng.

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Arsenault, M., Clayton, J. & Peng, L. Mortgage Fund Flows, Capital Appreciation, and Real Estate Cycles. J Real Estate Finan Econ 47, 243–265 (2013).

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  • Real estate cycles
  • Commercial real estate
  • Mortgage fund flows
  • Positive feedback loop

JEL Classification

  • G12
  • E32
  • E44