We investigate the dynamics of appraisal smoothing in the National Council of Real Estate Investment Fiduciaries (NCREIF) index return using time‐varying asset pricing models. We find that smoothing is on average close to zero but varies substantially over time. From the inception of the NCREIF index in 1978 until the mid‐1990s, there was little evidence of smoothing. Smoothing has increased significantly since the mid‐1990s to the end of 2010. Smoothing increases when property prices or uncertainty increases. However, it decreases when sentiment in the property market is high or during recession periods. The substantial variation in the level of smoothing indicates that the volatility of unsmoothed appraisal‐based property returns would be significantly over‐ or under‐estimated for different periods if unsmoothed with a long‐run average smoothing.