Rent-price Ratio Research Articles

House Prices and Rents

Abstract Variation in monthly metro area house prices unrelated to expected rents clouds the information about future rents in price-rent ratios and lagged changes in house prices. The variation in house prices unrelated to expected rents is, however, correlated across areas, and the problem is mitigated by measuring rent growth regression variables net of their monthly cross-section (across-area) means. This control for price variation unrelated to expected rents substantially enhances the information about future rents that we extract from price-rent ratios and lagged changes in house prices. (JEL C51, C58, D53, G14)

Analyzing individual rent price ratios in eastern German agricultural land markets: A GAMLSS approach

AbstractThis study explores the rent price ratio in agricultural land markets, crucial for evaluating market efficiency, policy needs, and farmer decision‐making. Traditionally, the analyses faced challenges due to the absence of concurrent sale and rent data for the same land, potentially leading to biased results. This research avoids this problem by utilizing a unique dataset from Eastern Germany, encompassing auction data from 2016 to 2019. This dataset is distinctive, containing both the purchase and lease price offers by individual farmers for the same agricultural land at a single point. Thus, this study overcomes the conventional limitations of using aggregated or non‐contemporaneous data. Hence, the focal point is to unravel the intricate relationship between individual rent price ratios and a myriad of influencing factors, including land characteristics and local farming structures. The use of Generalized Additive Models for Location, Shape, and Scale provides a robust framework for this analysis, offering a nuanced understanding of the distributional properties of individual rent price ratios. The study provides robust empirical evidence that highlights the need for adaptive and region‐specific policies if policy makers insist on intervening in the agricultural land market. Furthermore, promising points of departure for future research are identified. [EconLit Citation: Q15].

Interest Rates and the Spatial Polarization of Housing Markets

Rising within-country differences in house values are a much-debated trend in the United States and internationally. Using new long-run regional data for 15 advanced economies, we show that standard explanations linking growing price dispersion to rent dispersion are contradicted by an important stylized fact: rent dispersion has increased far less than price dispersion. We propose a new explanation: a uniform decline in real risk-free interest rates can have heterogeneous spatial effects on house values. Falling real safe rates disproportionately push up prices in large agglomerations where initial rent-price ratios are low, leading to housing market polarization on the national level. (JEL E43, R21, R31)

House price bubbles under the COVID-19 pandemic

We analyze bubble formations in house prices under the COVID-19 pandemic in 382 metropolitan areas in the U.S. with a special attention to the role of population density. We use a robust sieve-bootstrap version of the right-tailed unit root test procedure to identify periods of explosiveness in price–rent ratios across metro areas when controlling for fundamentals such as mortgage debt financing costs and the wealth of households. The bubble tests reveal evidence of explosive house prices during the COVID-19 pandemic but with important cross-area differences. In contrast to earlier bubble episodes, we find that the frequency and size of bubble formations under the pandemic have been stronger in low-density metro areas compared to high-density metro areas.

House prices and rents: a reappraisal

Abstract In this work, we introduce rental markets in a general equilibrium model with borrowing constraints and infinitely lived agents. We estimate our model using standard Bayesian methods and match US data on recent decades. We highlight a crucial relationship that strongly links interest rates, house prices, and rents. It represents agents’ arbitrage when choosing their degree of participation in the housing market (i.e. their real estate holdings). This framework is particularly well suited for explaining how policy-induced changes in households’ preferences have driven house prices up while pushing rent-price ratios down in the aftermath of the Covid-19 outbreak. It also allows us to parsimoniously track the unequal impact of these changes on agents’ decisions and welfare, which crucially depends on whether they are owners or renters.

Testing for financial bubbles in the presence of auto-correlated errors

How to detect financial bubble? In response to this question, a vast amount of empirical research is devoted spanning almost half-century. However, identifying unambiguously the presence of a bubble in the financial time series remains an unsolved problem in standard econometric and financial economic approaches. In this paper, we study the impact of auto-correlated innovations, which is a most common feature of the financial time series, on recently developed unit root tests with varying lag to detect financial bubbles. We apply the more powerful test procedure to identify bubble on the quarterly observations of house price-rent ratios of 4 counties. The results of the study suggest that rolling Max Supremum Augmented Dickey-Fuller (MSADF) test as the best test procedure to detect financial bubbles in the future.

Farmland sales under returns and price uncertainty

This paper investigates the observed heterogeneity in the liquidity of agricultural land markets. We adopt a real options model to determine the value of an opportunity to sell farmland and derive the optimal disinvestment triggers. A proportional hazards model is applied to estimate the duration between land sales in Germany and test the implications of the real options model. In contrast to expectations, we find an ambiguous effect of returns and price volatility on the optimal timing of land sales. There is no evidence that non-agricultural investors buy and sell land more frequently than farmers. Our results contribute to the current discussion on land market regulations, one major point of which is capping land prices. According to our results, such policies could increase the rent–price ratio and thus discourage land sales. In turn, the land supply would be reduced, causing further price pressure on farmland markets.

Spreads and Volatility in House Returns

Underlying idiosyncratic and illiquidity risks are suppressed in infrequently reported indexes of house prices and rents. Idiosyncratic risks result from bid–ask spreads for prices and rents. Time series autocovariances generate a distribution of prices and rents. Capital gains and rent-price ratios are transforms of these distributions, generating cross-sectional idiosyncratic volatility. Housing data are infrequent and usually made available every month. The monthly–quarterly volatility ratios of house prices and rents and their spreads estimate unobserved daily fluctuations and illiquidity risks. Including idiosyncratic and illiquidity risks, a U.S. house has a standard deviation in returns of 8.7% annually for three decades after 1990. With a mean excess return of 3.7%, the Sharpe ratio of 0.42 is comparable to the S&P 500. Excluding spreads, the house Sharpe ratio is 0.69. House returns respond to liquidity. A 1% increase in volume raises returns by 0.8%.

Early Real Estate Indicators during the COVID-19 Crisis

Abstract In this article we construct a number of early housing-market indicators from daily-scraped list-price data and investigate how they inform on housing-market trends prior to the release of official transaction data. We minimize the impact of non-market conform list prices by our data selection- and cleaning routine and thereby improve the overlap between list and transaction data. In addition to some well-known real-estate indicators (price and rent indices, price-rent ratios, market volume, time-on-market, and market turnover) we develop a new market sentiment indicator which we construct from the direction and frequency of online price changes for individual listings. We then use this group of indicators to investigate how housing markets in London and Vienna react to the COVID-19 pandemic during 2020. For London these indicators show high volatility during much of 2020 and we find that the sales and rental markets drift apart: The sales market shows an overall positive price trend, while the rental market becomes significantly weaker after the onset of the COVID-19 crisis. For Vienna we find that all indicators signal positive market developments for the first eight months after the start of the COVID-19 pandemic.

Housing supply and affordability: Evidence from rents, housing consumption and household location

We examine the effects of housing supply constraints on housing affordability, which we measure directly using quality-adjusted rent as well as indirectly using structure sizes, lot sizes and household location choices. Empirically, we find that housing supply constraints have only modest effects on rents and housing consumption despite their larger effects on city growth and the price to purchase homes. Calibration of a dynamic, spatial equilibrium model shows that supply constraints increase price-rent ratios because investors expect future rents to increase more with expected demand growth. Because rent is what matters for affordability, supply constraints have reduced affordability less than is commonly understood despite their sizable effects on the purchase prices of homes.

Can big data increase our knowledge of local rental markets? A dataset on the rental sector in France.

Social Scientists and policy makers need precise data on market rents. Yet, while housing prices are systematically recorded, few accurate data sets on rents are available. In this paper, we present a new data set describing local rental markets in France based on online ads collected through to webscraping. Comparison with alternate sources reveals that online ads provide a non biased picture of rental markets and allow coverage of the whole territory. We then estimate hedonic models for prices and rents and document the spatial variations in rent-price ratios. We show that rents do not increase as much as prices in the tightest housing markets. We use our dataset to estimate the market rent of each transaction and of social dwellings. In the latter case,this allows us to estimate the in-kind benefit received by social tenants which is mainly driven by the level of private rent in their municipality.

The distribution of the rent–price relationship of agricultural land in Germany

Abstract This paper studies the profitability of investments in agricultural land, using the rent–price ratio (RPR) as a profitability measure. In order to allow for district-level heterogeneity, the full conditional distribution of the RPR is modelled using a generalised additive model for location, shape and scale. The analysis is based on data from Lower Saxony, Germany. The profitability of investments in land varies between and within districts. The variation can be explained by differences in the farming structure, the production programme and economic indicators. Further, differences in the distribution of the RPR between arable land and grassland are found.

Value and momentum in the cross section of housing market returns of New Zealand

This paper examines if there are value and momentum effects in the New Zealand housing market across different regions. It is found that the short-term momentum effect exists with the winner regions in the past year outperforming the loser regions in the following year by 2.06%, mainly from capital gains, after adjusting for the market risk. The house returns exhibit long-term reversal with the winner regions in the last six years underperforming the loser regions in each of the next eight years due to lower capital gains. A value effect is present with regions with high rent-price ratios outperforming those with low rent-price ratios in each of the next seven years due to persistent higher rental yields. However, both the reversal effect and value effect can be explained by the market risk.

The user cost of housing and the price-rent ratio in Shanghai

We compute hedonic quality-adjusted price-rent ratios for residential housing in Shanghai. Our method corrects for selection into owner-occupied housing and for omitted variables. We find that quality adjustment reduces the price-rent ratio by 14 percent. Even so, a price-rent ratio of 70 in 2017 is still very high by international standards. In cross-section, the price-rent ratio is increasing in price, confirming previous findings for cities in western countries. But it is decreasing in rents. We attribute this new finding to the asymmetric impact of the hukou system on owner-occupiers and renters in China. We then examine, in a user-cost setting, why the price-rent ratio is so high. The key driver is the extremely high rate of expected capital gains, which we argue has turned the user cost of owner-occupying negative. We explore how this affects the interpretation of observed price-rent ratios.

The resilience and realignment of house prices in the era of Covid-19*

PurposeThe study aims to analyze the effects of the Covid-19 pandemic on house prices.Design/methodology/approachThe authors start by discussing the possibility that house price indexes may not fully incorporate the effects of the pandemic as of yet. Against the background of the pandemic, the authors then analyze economic and behavioral effects affecting house prices. The authors also discuss how the linkages between tourism and house prices have been affected. The authors further present evidence of an emerging shift in preferences from urban locations to more peripheral ones.FindingsThe authors report variance in the evolution of house prices across countries at the onset of the pandemic, with locations depending heavily on tourism showing slower price appreciation while appreciation has firmed in other places. The authors argue that the resilience of house prices is not only because of the low-interest rate environment and government efforts to support firms and households, but also behavioral factors. In some locations, the price of condominiums has declined relative to the price of detached houses. This could indicate that wealthier households are seeking more space and larger units as a result of the crisis. There is also evidence of a downward pressure on rents, leading to increased price–rent ratios in the USA.Originality/valueBy considering both economic and behavioral factors, this paper provides for a better understanding of the resilience and realignment of house prices at the onset of the Covid-19 pandemic.

International Real Estate Review

We apply the dynamic Gordon growth model to the Hong Kong real estate market to analyze quarterly data on four kinds of real estate—housing, office, retail, and factory properties—from 1999 to 2020. We find that factories have the highest total returns among the four types of real estate, and also a larger Sharpe ratio. The total returns of these four kinds of real estate are highly correlated. The results of an autoregressive distributed lag model show that the gross domestic product growth rate is the key determinant of real estate returns, while changes in foreign direct investment also influence housing and retail returns. The expected value of the risk-free rate is the key factor that determines the rent-price ratio. The decline in the risk-free rate in Hong Kong is the main reason that the real estate price-rent ratio has increased from 20 to 40 in the last twenty years. Our research represents an early contribution that compares the performance of housing and commercial real estate at the city level, with both types of real estate having similar determinants. Finally, we find that the fall in risk-free interest rates worsens housing affordability in Hong Kong.

Do Credit Conditions Move House Prices?

To what extent did an expansion and contraction of credit drive the 2000s housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving most of the house price cycle. We show that the key difference behind these disparate results is the extent to which credit insensitive agents such as landlords and unconstrained savers absorb credit-driven demand, which depends on the degree of segmentation in housing markets. We develop a model with frictional rental markets that allows us to consider cases in between the extremes of no segmentation and perfect segmentation typically assumed in the literature. We argue that the relative elasticities of the price-rent ratio and homeownership with respect to an identified credit shock is a sufficient statistic to measure the degree of segmentation. We estimate this moment using three different credit supply instruments and use it to calibrate our model. Our results reveal that rental markets are highly frictional and closer to fully segmented, which implies large effects of credit on house prices. In particular, changes to credit standards can explain between 34% and 55% of the rise in price-rent ratios over the boom.

Homeownership, Inequality, and Polarization

In recent decades, the U.S. labor market has become more unequal and polarized: wage differences have widened and middle-income jobs have been replaced by low- and high-income jobs. The rise in inequality and polarization have been more pronounced in large cities. I argue that this can be explained by higher house price growth in big cities, which makes it harder for middle-income households to buy a house there. I build a spatial equilibrium model in which households differ by skill, and choose where to live and whether to rent or own housing. Low-skilled households cannot afford to buy in any location, while the high-skilled can buy anywhere. Meanwhile, the middle-skilled can only buy a house in affordable places. Thus, the middle of the skill distribution in expensive locations empties out, making them more polarized and unequal. Empirical evidence supports these predictions. First, middle-income households are more likely to move to states with lower house prices for housing-related reasons than those with low or high income. Second, polarization and inequality grew more in commuting zones where prices increased the most. Counterfactual experiments show that rising price-wage and price-rent ratios account for 12% to 21% of the increase in low and high-paid jobs and for 7% to 10% of the growth in the variance of log wages in the 20 largest commuting zones since 1980.

The Resilience and Realignment of House Prices in the Era of Covid-19

Purpose:The article analyzes the effects of the COVID-19 pandemic on house prices.Design/Methodology/Approach:We start by discussing the possibility that house price indexes may not fully incorporate the effects of the pandemic as of yet. Against the background of the pandemic, we then analyze economic and behavioral effects affecting house prices. We also discuss how the linkages between tourism and house prices have been affected. We further present evidence of an emerging shift in preferences from urban locations to more peripheral ones.Findings:We report variance in the evolution of house prices across countries at the onset of the pandemic, with locations depending heavily on tourism showing slower price appreciation while appreciation has firmed in other places. We argue that the resilience of house prices is due not only to the low interest rate environment and government efforts to support firms and households, but also behavioral factors. In some locations, the price of condominiums has declined relative to the price of detached houses. This could indicate that wealthier households are seeking more space and larger units as a result of the crisis. There is also evidence of a downward pressure on rents, leading to increased price-rent ratios in the U.S.Originality/Value:By considering both economic and behavioral factors, this paper provides for a better understanding of the resilience and realignment of house prices at the onset of the COVID-19 pandemic.

Bubbling Away: Forecasting Real Estate Prices, Rents, and Bubbles in a Transition Economy

Real housing prices have both surged and swooned in formerly socialist countries. We use 2000–2017 aggregate housing sales and rental price data from Kazakhstan to explore price movements during boom and stagnation eras, investigating the rent–price ratio’s (RPR) capacity to predict housing returns and rent growth for an emerging post-Soviet economy. RPR predicts returns better during periods of price increases than declines, and its importance in predicting the bubble component diminishes with time. Short-run RPR changes are consistent with rational bubble behavior during the period of secular upswing but different predictive variables matter during price increases and declines.