The Long-Run Relationship Between House Prices and Rents

Joshua Gallin

Real Estate Economics, 2008, vol. 36, issue 4, pages 635-658

Abstract: I use standard error-correction models and long-horizon regression models to examine how well the rent-price ratio predicts future changes in real rents and prices. I find evidence that the rent-price ratio helps predict changes in real prices over 4-year periods, but that the rent-price ratio has little predictive power for changes in real rents over the same period. 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, and 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. Copyright 2008 American Real Estate and Urban Economics Association

Date: 2008
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