Rent-price Ratio Research Articles

Global Housing Markets and Monetary Policy Spillovers: Evidence from OECD Countries

What are the driving forces of housing market volatilities across countries within the context of financial globalization? To address this broad question, we integrate the Campbell-Shiller decomposition with a dynamic factor model and apply this approach to the housing price-rent ratios in 17 OECD countries. Our novel approach allows us not only to assess geographically the relative importance of global and country-specific factors in explaining the housing market volatilities, but also to distinguish economically between those housing market volatilities attributable to different economic driving forces including the expected rent growth, the expected risk free rate, and the housing risk premium, within global and country-specific factors respectively. We find that the housing market volatility for an average country is mainly driven by the global factors, especially during the years leading up to the 2007-2008 financial crisis. Furthermore, among the global factors it is the global housing risk premium component that is primarily responsible for the housing market volatility. Using a Structural Vector-Autoregressive (SVAR) model identified through the instrumental variable method, we find that an unexpected U.S. monetary policy tightening is typically followed by a persistent and statistically significant rise in the global housing risk premium with some lag to a run-up of the U.S. housing risk premium. Moreover, the local factor in U.S. housing risk premium tends to go up sharply around 2 years before a U.S. recession, and leads the global housing risk premium. Our findings are broadly in line with the credit or risk-taking channel of the monetary policy spillovers from the United States to the global financial markets.

임대-매매가격비율의 동적요소에 대한 분석

임대-매매가격비율의 동적요소에 대한 분석

Price bubbles and policy interventions in the Chinese housing market

The recent dramatic increases in house prices have led to considerable attention being focused on housing markets in China. Using a unique dataset of city-level house prices and rents, this paper investigates the presence of price bubbles in major Chinese city housing markets. Our findings show evidence of price bubbles in most housing markets, even though the bubbles might be, to a large extent, mitigated by strong government intervention. In order to distinguish rational bubbles from irrational bubbles, we extend the existing work to allow a deterministic time trend and break points in the unit root test of house price–rent ratios. As a consequence, our results demonstrate that the price–rent ratios in most of the sample cities are no longer non-stationary, implying the non-existence of rational bubbles in the housing markets.

Price Bubbles and Policy Interventions in the Chinese Housing Market

The recent, dramatic increases in house prices have led to considerable attention being focused on housing markets in China. Using a unique dataset of city-level house prices and rents, this paper investigates the presence of price bubbles in major Chinese city housing markets. Our findings show evidence of price bubbles in most housing markets, even though the bubbles might be, to a large extent, mitigated by strong government intervention. In order to distinguish rational bubbles from irrational bubbles, we extend the existing work to allow a deterministic time trend and break points in the unit root test of house price-rent ratios. As a consequence, our results demonstrate that the price-rent ratios in most of the sample cities are no longer non-stationary, implying the non-existence of rational bubbles in the housing markets.

Predictors and Portfolios Over the Life Cycle

We show that the net corporate payout yield predicts both the stock market index and house prices and that the log home rent-price ratio predicts both house prices and labor income growth. We incorporate the predictability in a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. We find that households can significantly improve their welfare by optimally conditioning decisions on the predictors. For a modestly risk-averse agent with a 35-year working period and a 15-year retirement period, the present value of the higher average life-time consumption amounts to roughly $179,000 (assuming both an initial wealth and an initial annual income of $20,000), and the certainty equivalent gain is around 5.5% of total wealth (financial wealth plus human capital). Furthermore, every cohort of agents in our model would have benefited from applying predictor-conditional strategies along the realized time series over our 1960-2010 data period.

Hedonic price–rent ratios, user cost, and departures from equilibrium in the housing market

Departures from equilibrium in the housing market can be detected by comparing the actual price–rent ratio with the price–rent ratio derived from the user cost equilibrium condition. The equilibrium price–rent ratio, however, assumes that the sold and rented dwellings being compared are of equal quality, which is typically not the case. Using hedonic methods applied to prices and rents for 730,000 houses in Sydney, Australia, we find that quality-adjusting reduces the actual price–rent ratio by on average 18%. Failure to make such a correction therefore will seriously bias the results towards a finding that the price–rent ratio is above its equilibrium level. We also explore ways of imputing the expected capital gain – a key input into the equilibrium price–rent ratio formula, and show that price–rent ratios (both actual and equilibrium) vary in systematic ways over the housing distribution. This latter result implies that it is not enough to simply focus on the median, as different results may pertain for other quantiles.

Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market

Departures of the housing market from equilibrium can be detected by comparing the actual price-rent ratio with the user cost of owner occupying. Empirical implementation of this idea, however, is problematic for two reasons. First, the price-rent ratio needs to be quality adjusted. Second, the expected capital gain -- an important input into the user cost formula -- is not directly observable. Using a large data set for Sydney-Australia, we show how these problems can be resolved using hedonic methods. Otherwise the user cost approach can generate highly misleading results.

Understanding Housing Market Volatility

The Campbell–Shiller present value formula implies a factor structure for the price–rent ratio of housing market. Using a dynamic factor model, we decompose the price–rent ratios of 23 major housing markets into a national factor and independent local factors, and we link these factors to the economic fundamentals of the housing markets. We find that a large fraction of housing market volatility is local and that the national factor has become more important than local factors in driving housing market volatility since 1999, consistent with the findings in Del Negro and Otrok (2007). The local volatilities mostly are due to time variations of idiosyncratic housing market risk premia, not local growth. At the aggregate level, the growth and interest rate factors jointly account for less than half of the total variation in the price–rent ratio. The rest is due to the aggregate housing market risk premium and a pricing error. We find evidence that the pricing error is related to money illusion, especially at the onset of the recent housing market bubble. The rapid rise in housing prices prior to the 2008 financial crisis was accompanied by both a large increase in the pricing error and a large decrease in the housing market risk premium.

What factors drive the price–rent ratio for the housing market? A modified present-value analysis

We consider which factors determined the price–rent ratio for the housing market in 18 U.S. metropolitan statistical areas (MSAs) and at the national level over the period of 1975–2014. Based on a present-value framework, our proposed empirical model separates the price–rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price–rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and MSA levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. These are also the MSAs with less elastic housing supply. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price–rent ratios, especially during the 2005–2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated implying an impact of the expected housing return on house prices that is amplified from what a standard present-value model would imply. Our results also show that most of the variation in the present-value component of the price–rent ratio arises due to the variation in the expected housing return.

Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries

We conduct a comprehensive international study of predictability in housing markets using the rent-price ratio as a predictive variable. On data from 18 OECD countries we generally find return predictability in accordance with time-varying risk-premia, but we also document two puzzles. First, there is a highly unstable predictive pattern in rent growth across countries and time periods. Second, the predictive patterns are highly dependent on whether housing returns and rents are measured in nominal or real terms. These results are difficult to reconcile with fully rational expectations. Among other things, the results indicate that housing markets in many countries suffer from money illusion.

Housing Boom-Bust and Price-Rent Dynamics Over the Business Cycle

Housing market is documented with several observations: considerably larger fluctuations in housing prices than in rents, correlation between housing prices and investment, lead-lag pattern of housing and macroeconomic variables. This paper constructs a two-sector housing model with home owning/renting heterogeneity and housing financial frictions to explain the observed facts in housing markets and to explore the interactions between housing markets, rental markets and mortgage markets. The model provides theoretical explanations to the housing boom-bust and the transmission mechanism of housing market fluctuations to business cycles. The paper predicts that house rent-price ratio correlates with expected house price growth and changes with temporary shocks in financial constraints and/or persistent changes in mortgage rates. Model extension suggests that home ownership is endogenously determined by down payment restrictions and aggregate shocks. The model matches with the empirical evidences observed in house market. The quantitative results suggest that the financial shock generates house price fluctuation considerably larger than rents, which explains the observed price-rent fluctuations.

A new approach to estimating value–income ratios with income growth and time-varying yields

Value–income ratios, such as dividend yields in finance and price–rent ratios in housing and real estate markets, impact society in a variety of ways. This paper proposes a new type of the present value model that features income growth with time-varying yields. It offers a new risk perspective, which may alleviate timid investor behavior in market downturns while cooling down the market in seemingly booming times. A binding relationship, the value–income ratio adjusted by yields of the asset and growth in income, is revealed. This has notable implications for empirical research, which examines value–income ratios time and again. Incorrectly perceived market behavior distorts the formation of investor behavior, and vice versa, which has serious consequences to the functioning of the market and beyond.

Understanding the cross-section of the U.S. housing bubble: The roles of lending, transaction costs, and rent growth

This paper establishes baseline valuations for housing assets using rent cash flows in 22 regions of the U.S. in a Lucas (1978) framework. The model matches the unconditional averages of the price–rent ratios from 1978 to 2012 quite well; however, the model valuations after 2002 are well below the market price–rent ratios. We explore three mechanisms to understand these housing overvaluations in the post-2002 period relative to the consumption-based model: (1) using cross-sectional subprime consumer and commercial lending characteristics; (2) transaction costs; and (3) turning off the pro-cyclicality of the rent growth in the data. We find that all three factors explain some fraction of the bubble in valuations, but none alone is enough to understand the full extent of post-2002 valuations.

What Moves the Price-Rent Ratio for Housing? A Modified Present-Value Approach

We consider which factors determined the price-rent ratio for the housing market in 18 U.S. metropolitan areas (MSAs) and at the national level over the period of 1975 to 2012. Based on a present-value framework, our proposed empirical model separates the price-rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price-rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and regional levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price-rent ratios, especially during the 2005-2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated in the pre-2006 sample period, implying an impact of the expected housing return on house prices that is different than what a standard present-value model would imply, although this correlation declined significantly in the post- 2006 sample period. Our results also show that most of the variation in the present-value component of the price-rent ratio arises due to the variation in the expected housing return.

Housing Markets, Regulations and Monetary Policy

This paper shows that monetary policy has uneven impacts on local housing markets, and that the magnitude of the impacts are correlated with housing supply regulations. We apply the linearized present value model, which allows the log rent-price ratio to be decomposed into the expected present values of all future real interests rates, real housing premia and real rent growth, to the housing markets in 23 U.S. metropolitan statistical areas. Based on the indirect inference bias-corrected VAR estimates, we find that MSAs that are more regulated have i) a higher variance in the log rent-price ratio, ii) a larger share of the variance explained by real interest rate, and iii) a stronger impulse response of house price to the real interest rate shock.

Predicting Returns and Rent Growth in the Housing Market Using the Rent-to-Price Ratio: Evidence from the OECD Countries

We conduct a comprehensive international study of predictability in housing markets using the rent-price ratio as a predictive variable. On data from 18 OECD countries we generally find return predictability in accordance with time-varying risk-premia, but we also document two puzzles. First, there is a highly unstable predictive pattern in rent growth across countries and time periods. Second, the predictive patterns are highly dependent on whether housing returns and rents are measured in nominal or real terms. These results are difficult to reconcile with fully rational expectations. Among other things, the results indicate that housing markets in many countries suffer from money illusion.

To Buy or Not to Buy? The Changing Relationship between Manhattan Rents and Home Prices

Much of the nation has experienced steep declines in housing prices in recent years. In Manhattan, however, apartment sales prices did not fall as sharply. A study of price-rent ratios in the New York City borough concludes that, while apartment rents are driven by supply and demand forces, apartment sales prices are driven in part by speculative factors, and they sometimes rise or fall to levels incommensurate with prevailing rents. Manhattan price-rent ratios, although off their 2008 highs, are still up dramatically over the past two decades, suggesting less financial “value” today in an apartment purchase there.

Housing Careers, Price–Rent Ratios and Rental Equivalence

This paper analyses price–rent (PR) ratios under different housing career structures. A housing market with three segments for owner-occupation and a segment with rental housing is applied. A housing career is characterized by how households move between rentals and owner-occupied housing. While rents are completely passed through to the house price index when rentals represent alternative housing to all forms of owner-occupation, non-constant PR ratios are derived from more realistic housing career structures. In the presence of equity induced up-trading housing markets dominated by family homes are likely to see short-term deviations in PR ratios exceeding those of housing markets dominated by starter homes.

Understanding Housing Market Volatility

The Campbell-Shiller present value formula implies a factor structure for the price-rent ratio of the housing market. Using a dynamic factor model, we decompose the price-rent ratios of 17 major housing markets into a national factor and independent local factors, and we link these factors to the economic fundamentals of the housing markets. We find that a large fraction of housing market volatility is local. And the local volatilities mostly are due to time-variations of idiosyncratic housing market risk premiums, not local growth. At the aggregate level, the growth and interest rate factors jointly account for up to 47% of the total variations in the price-rent ratio. The rest is due to the aggregate housing market risk premium and a pricing error. We find evidence that the pricing error is related to money illusion, especially at the onset of the recent housing market bubble. The rapid rise in housing prices prior to the 2008 financial crisis was accompanied by both a large increase in the pricing error and a large decrease in the housing market risk premium.

House Prices and Fundamentals: 355 Years of Evidence

This paper examines the long run relation between prices and rents for houses in Amsterdam from 1650 through 2005. We first demonstrate that these series are cointegrated, a necessary condition for studying movements of the rent-price ratio. We then estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long-lasting. Lastly, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades.