Finance and Economics Discussion Series: The Long-Run Relationship Between House Prices and Rents (Paperback) (ISBN-13: 9781288712069)

I show that when house prices are high relative to rents (that is, when the rent-price ratio is low) changes in real rents tend to be larger than usual and changes in real prices tend to be smaller than usual. Standard error-correction models provide inconclusive results about the predictive power of the rent-price ratio at a quarterly frequency. I use a long-horizon regression approach to show that the rent-price ratio helps predict changes in real rents and real prices over three-year periods. This result withstands the inclusion of a measure of the user cost of capital. I show that a long- horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk. I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent-price ratio is an indicator of valuation in the housing market.

Author: Joshua Gallin
ISBN-10: 1288712065
ISBN-13: 9781288712069
Publisher: Bibliogov
Language: English
Published: 02/06/2013
Pages: 32
Format: Paperback
Weight: 0.17lbs
Size: 9.69h x 7.44w x 0.07d