Abstract
The rent-to-price ratio is one of the popular indicators for monitoring the property market. This study explores micro-scale spatial dynamics of the ratio for houses at the individual property level in Seoul, South Korea. We match the apartment unit sold and the one leased based on the carefully chosen criteria and apply a Bayesian multi-level modeling approach to this matched dataset. We employ the Integrated Nested Laplace Approximations (INLA) algorithm in order to estimate relevant parameters in the multi-level model. The ratio determinants found in the study include property age, apartment unit area, interest rate, and floor. This study also presents the importance of taking into account the hierarchical structure of apartment units, as well as seasonal and spatial variations when estimating the ratio and predicting future trends in the property market based on the ratio.
Highlights
The relationship between house prices and rents has always been a major concern for parties in the housing market
The rent-to-price ratio has been a popular indicator for monitoring the housing market, and considerable literature on the housing market has assumed that there exists a fundamental relationship between house prices and rents
As for the significance of coefficients, the 95th percentile ranges of all the coefficients do not overlap zeros except the 3-year bond interest rate, β3−year bond, which indicates that most explanatory variables have their roles in explaining the rent-to-price ratio
Summary
The relationship between house prices and rents has always been a major concern for parties in the housing market. André, Gil-Alana, and Gupta (2014) empirically analyzed price-to-income and priceto-rent ratios in a sample of 16 OECD countries spanning four decades, and found that the ratios are highly consistent, almost always showing the tendency to return to their historical average value. In accordance with this finding, ratios that have deviated from their long-term values have often raised concerns among various parties in the housing market, such as houses being overvalued. The ratio has played a important role in the managing of property portfolios by investors, as different ratios across regions require different strategies for portfolio management
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