The long-run relationship between house prices and rents

By Joshua Gallin. 2004

378 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/673016620a9520f1bfa0c857a9cd68179d007e38

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Citations in the corpus

Testing for Bubbles in Housing Markets: A Panel Data Approach (2009, methodology): “Gallin (2006) remedies this shortcoming and reverses the conclusion. The second category focuses on local markets with attention to fundamental variables being more closely attached to house characteristics. Smith and Smith (2006) estimate the fundamental values of a house using rent and price data ”
On the macroeconomic determinants of the housing market in Greece: a VECM approach (2016, background): “Aggregate and panel data evidence Mikhed and Zemcik (2009) Housing Prices, Income, Population, Rents, Interest rates, Construction Cost, Stock market.”
Forecasting real estate prices (2012, methodology): “Meese and Wallace (1994), Capozza and Seguin (1996), Gallin(2008), and Campbell, Davis, Gallin, and Martin (2009) are some of the studies testing forreturn predictability within the above framework while Himmelberg, Mayer, and Sinai (2005) offer aslightly broader approach.”
Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis (2011, positive): “Underwriting standards will 10 Some authors pointed to the rise in price-rent ratios as likely to be followed by a reduction in subsequent price growth (Gallin 2008, Campbell, et al. 2009).”
Explosive bubbles in house prices? Evidence from the OECD countries (2015, neutral): “[16] Gallin, J.”
Housing Bubbles: A Survey (2011, positive): “For example, Gallin (2006) shows that prices and rents are cointegrated but also that the pricerent ratio predicts future changes in both prices and rents over a four-year horizon.”
What moves housing markets: A variance decomposition of the rent-price ratio (2009, background): “Versions of this expression can be found in Cutts et al. (2005), Gallin (2008), Himmelberg et al. (2005), Verbrugge (2008), and elsewhere.”
Housing Market Spillovers: Evidence from an Estimated DSGE Model (2010, positive): “As a crude way of measuring the spillovers, we run a basic version of the consumption growth regression that, starting from the benchmark random walk model, allows for housing wealth to a¤ect aggregate consumption.”
Housing and transport expenditure: Socio-spatial indicators of affordability in Auckland (2014, background): “Research shows that long-term house prices and rents are closely related (Gallin, 2008; Meese & Wallace, 1994).”
The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing (2008, neutral): “Gallin (2004) constructs a quarterly index of prices relative to rents, but does not identify the level of the ratio at any point in time.”
Self-reinforcing effects between housing prices and credit: an extended version (2013, methodology): “11 lagged real price appreciation to enter our dynamic model.9 This is similar to Abraham and Hendershott (1996), Gallin (2008) and Anundsen (2012) on US data, and it is consistent with the lagged housing price appreciation not having permanent effects, but rather that it picks up a momentum or the…”
The Persistence of Local Joblessness (2018, background): “If current conditions are a su cient statistic for future conditions, one can still derive an equation like (9); but the sensitivity to conditions is a mixture of the true sensitivity and the persistence in utility; see Gallin (2004). Gallin also shows how one can derive an Euler equation for the mi”