Inflation and Housing Prices*

Lewis J. Spellman

Real Estate Economics, 1981, vol. 9, issue 3, 205-222

Abstract: Home ownership is a claim on the stream of net rents. Like any income‐producing asset, the market capitalizes its value. The price‐rent multiple depends upon the expected growth rate of revenues and expenses, on financing terms, and on taxes. This paper derives this price‐rent multiple in terms of these variables and calculates its value from 1963 through 1978. The results indicate that housing prices grew more rapidly than rents and the CPI largely as the result of a 33% increase in the price‐rent multiple over those years. This increase in the capitalization rate occurred, despite higher nominal financing terms, because the relative terms of housing finance tended to ease and because the expected growth rate of rents increased more than its discount rate.

Date: 1981
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