Editor Choice- Housing Price Leads Rent in Hong Kong? -- A Puzzle of Rent-Price Theory

Abstract

This study analyzes the lead-lag relationships between housing price growths, rent growths and the expected housing rent changes. Theories, including the DiPasquale-Wheaton (DW) Model, assumes housing price as a discounted sum of net future rent. However, a large number of contrary evidence has been found in many different parts of the world, such that housing price leads rent. We contend that the DW Model ignores the expectation of rental growth, and therefore it is hypothesized that the expected future rental growth is determined, among others, by the discount rate, which is one of the key determinants of housing price. One of the testable implications of this hypothesis is that the expected rental growth should lead the housing price growth. The empirical results suggest that investors’ expectations on the future rent Granger caused the housing price growth, in all the four sub-sectors of housing market in Hong Kong from January 1999 to April 2010.