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Summary
This paper examines both practically and statistically the possibility of creating a transactions‐based real estate price index similar to the well‐known stock and bond indices. While the necessary methodology is available, differences in the real estate asset (and hence in the markets in which it trades) are shown to prohibit the development of such an index even under ‘ideal’ circumstances. First, in an informationally inefficient market, it is not in the best interest of most decision‐makers to engage in the kind of complete disclosure needed to produce an accurate index. Second, even with complete disclosure, the number of transactions needed statistically to adjust for property differences substantially exceeds the number of quarterly transactions in most markets. While the empirical work supporting these conclusions is based on US data, the authors believe that similar constraints exist in most of the world's major markets and that investment professionals will be forced to work with less than ideal real estate proxies in constructing the global mixed‐asset portfolio.
