The purpose of this paper is to examine the long‐term relationship between the rate of inflation and the returns of real estate and financial assets traded in New Zealand markets.
The question of whether these assets are good candidates to hedge inflation in the long run is addressed employing cointegration and causality tests on quarterly data for the period from December 1979 to December 2003.
A strong long‐term relationship was found between the returns offered by all types of real estate assets (i.e. residential, commercial, industrial and farm building) and the rate of inflation. However, such a long run relationship is not detected between the rate of inflation and the returns of financial assets (i.e. stocks, short‐term bills and long‐term bonds).
The empirical findings reveal that the direction of causality is from inflation to real estate assets indicating that changes in property prices do not cause inflation in New Zealand; the cause of inflation is independent of the price movements for real estate assets. The real estate assets are found to offer an effective hedge against inflation in the long run. The same cannot be said for the financial assets, however.
This is the first New Zealand study which investigates the long‐term inflation hedging effectiveness of both real estate and financial assets. The findings should be of interest to most of the investors in New Zealand as the real estate assets play a significant role in their portfolio decisions.
