1. A. build a graph showing how inflation-adjusted investment of $1 in residential real estate changed in 1972-2014 and include it in your deliverable. Note that Fisher equation relates nominal return to real (inflation-adjusted) return:
In other words, estimate real return every year, compound it, and build a graph. Note that CPI in data file stands for Consumer Price Index and, therefore, the change in this index is the annual rate of inflation.
B. Comment on relationship between real estate prices and inflation. Does residential real estate offer protection against inflation? Quantify your answer. You may take a closer look at numbers in period of high inflation in the United States. Also, report pairwise correlations for various asset classes in 1975-2014.
C. Does investment in real estate investment trusts proxy for investment in residential real estate? In other words, can they be viewed as a substitute to investment in residential housing? You need to report pairwise correlations and cumulative returns over the 1975-2014 period to support your answer.
D. The United States and Canada’s housing data in Figure 1 is widely cited to rationalize expectations of a price correction in the Canadian housing market. Two arguments can be put forward to support expectation of price correction in Canada. Try to reproduce these arguments.
Figure 1. Real house prices: Canada vs US
![http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/home-buying/article11502773.ece/BINARY/w620/Real+house+prices%3A+Canada+vs.+the+U.S.]()
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NOMINAL REAL REAL
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tea521
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