Consumption-Wealth Ratio and Expected Housing Return

N Kishor and Swati Kumari

Journal of Real Estate Research, 2014, vol. 36, issue 1, 87-108

Abstract: In this paper, we estimate expected return on housing by exploiting information from the variations in the consumptionwealth ratio. We combine a present-value model of consumption with an unobserved component model to express the excess consumption-assets ratio (consumption in excess of labor income) as a linear function of unobserved return on housing assets, financial assets, and consumption growth. We apply a Kalman filter to extract expected housing asset returns from the history of realized returns and excess consumption growth. Our results suggest that filtered housing returns do a significantly better job in predicting realized housing returns than other popular predictors.

Date: 2014
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DOI: 10.1080/10835547.2014.12091383

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