Keywords: House prices, rent, error correction
Abstract: 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.
Full paper (317 KB PDF)
Home | FEDS | List of 2004 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: October 4, 2004