Modelling Housing Prices using a Present Value State Space Model

Dooruj Rambaccussing

No 285, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: This paper introduces a State Space approach to explain the dynamics of rent growth, expected returns and Price-Rent ratio in housing markets. According to the present value model, movements in price to rent ratio should be matched by movements in expected returns and expected rent growth. The state space framework assume that both variables follow an autoregressive process of order one. The model is applied to the US and UK housing market, which yields series of the latent variables given the behaviour of the Price-Rent ratio. Resampling techniques and bootstrapped likelihood ratios show that expected returns tend to be highly persistent compared to rent growth. The ltered expected returns is considered in a simple predictability of excess returns model with high statistical predictability evidenced for the UK. Overall, it is found that the present value model tends to have strong statistical predictability in the UK housing markets.

Keywords: Price-Rent Ratio; Present Value; State Space (search for similar items in EconPapers)
JEL-codes: C32 R31 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2015-02
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Modelling Housing Prices using a Present Value State Space Model (2015)
Working Paper: Modelling Housing Prices using a Present Value State Space Model (2015)
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