The rise and fall of the price-to-rent ratio: why are superstar cities different?

Christian Hilber and Andreas Mense

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In most countries, during the 2000s and 2010s, house prices rose substantially relative to rents. This trend, however, was not uniform across space or time. The price-to-rent ratio increased much more strongly in the countries’ superstar cities, surged during economic expansion periods, but fell during times of economic crisis. These stylised facts are consistent with a model that features spatial variation in the supply-price elasticity and autocorrelated local demand changes that trigger persistent changes in rent-growth expectations. The model predicts that in supply-inelastic locations, positive (negative) demand shocks trigger increases (decreases) in the price-to-rent ratio that last several years. Stronger demand-change persistence and lower discount rates amplify this effect. We test our model predictions using panel data for England. Our instrumental-variable first-difference estimates suggest that over half of the 153% increase in the price-to-rent ratio between 1997 and 2018 in Greater London can be explained by our mechanism.

Keywords: house prices; housing rents; price-to-rent ratio; price and rent dynamics; housing supply; persistence in demand changes; expectations; discount rate; land use regulation (search for similar items in EconPapers)
JEL-codes: J1 Q15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2026-07-25
New Economics Papers: this item is included in nep-hre
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Published in The Economic Journal, 25, July, 2026. ISSN: 0013-0133

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