THE IMPACT OF INFLATION CHANGES ON INVESTOR BEHAVIOR IN THE EUROPEAN REAL ESTATE MARKET

Abstract

This paper analyzes the impact of changes in inflation on investor behavior in the European real estate (hereinafter – RE) market. The study employs correlation analysis and an Autoregressive Distributed Lag (hereinafter – ARDL) model, enabling the assessment of both short-term and long-term relationships between inflation, ECB-set interest rates and investor behavior, which is measured by the overall RE market return indicator — the FTSE EPRA/NAREIT Europe Total Return Index (hereinafter – NAREIT). The research findings reveal that unexpected inflation shocks generate a negative reaction in real estate returns in the short term and increase their volatility, reflecting heightened investor risk perception and indicating that investors respond to monetary policy tightening. In the long term, a weak but statistically significant positive relationship is identified, confirming the partial inflation-hedging effect of RE. The results suggest that the impact of inflation changes on investor behavior in the European RE market operates not only through fundamental economic channels but is also multidimensional, encompassing both rational investment decisions and psychological factors influencing market valuation and capital allocation. The findings may be useful for both institutional and individual investors in making strategic financial decisions, as well as for policymakers seeking to create favorable conditions for the stability of RE markets.