Digging Into Real Estate
Economist is searching for best ways to forecast volatility of real estate investment trusts
BY TERESA PITMAN
|Prof. Jian Zhou balances his interest in the complexities of real estate economics with a love for professional sports. Photo by Martin Schwalbe|
Choosing a university major wasn’t easy for Prof. Jian Zhou, who joined the Department of Marketing and Consumer Studies last spring. Born and raised in China, he was the first person in his extended family to go to university. His parents had no formal education past elementary school.
“Because they’d never been to university, my parents weren’t able to give me much advice,” he says.
At the time, however, real estate was a “hot industry” in China, Zhou recalls. “So I decided to study economics with a focus on real estate.”
After completing a master’s degree in China, he headed to the University of Illinois at Chicago to pursue a PhD in economics. And, yes, it was a huge culture shock to move from China to the United States. “It’s so different; everything is different,” he says.
For his PhD research, Zhou examined the phenomenon that housing prices were rising more quickly than market fundamental variables such as incomes in almost every U.S. metropolitan area. The then ever-rising house prices caused concerns among potential home buyers. They were apparently wondering if houses had been out of line relative to the market fundamentals, says Zhou. “I wanted to give people an answer to these concerns.”
He then went on to analyze Chicago’s single-family housing market and found that over a long period of time — usually decades — housing prices tend to be consistent with the levels determined by the market fundamentals (incomes, populations, construction costs, mortgage rates, etc.) “But over short periods such as five or even 10 years, prices could deviate significantly from the market fundamentals,” he says.
Since completing his dissertation, Zhou has begun research on a related area: real estate investment trusts (REITs). “REITs have become an important asset in people’s investment portfolios along with stocks and bonds.”
Like any other financial assets, REITs witness ups and downs in their prices, he says. To measure the changes in price, economists use volatility, which is widely regarded as a proxy of the risks associated with investing in REITs. He emphasizes the importance of forecasting REIT volatility.
“A variety of investment activities such as derivative pricing and portfolio diversification depend on our ability to accurately forecast the volatility. The risks, as measured by the levels of volatility, must be justified by appropriate levels of rates of return.”
So Zhou is currently focusing on searching for the best ways to forecast REIT volatility. “I’m comparing the forecasting performances of different methods, and I think my findings will ultimately be useful for financial practices.”
His interest in the complexities of real estate economics is balanced out by his other love — professional sports. “I’m a big sports fan, but I have to admit I don’t like hockey. I don’t like the fighting.” Baseball and football are his favourite sports. “I’m a Chicago White Sox fan, like Obama.”
Zhou opted to come to U of G because he was “impressed by the quality of research being done in the department, because the city is so beautiful and because it’s close to Toronto.” Being near Toronto matters because he craves the real Chinese food available in Toronto’s Chinatown, something he says he can’t get in Guelph and can’t make for himself. “I’m a bad cook.”
Although moving from China to Chicago was a big adjustment for Zhou, the transition from the United States to Canada was much easier. And once he had settled in at Guelph, he was able to do something he hadn’t done for 4½ years while completing his PhD and looking for a job — visit his family in China.
“The last time I was home was for my sister’s wedding. This winter I went back and got to see my niece, who was born three years ago. People had told me that she looks like me, and I thought: ‘Wow, she must be ugly.’ But she’s beautiful. I hope I’ll be back to see her again soon — sooner than 4½ years anyway.”