Predicting returns and rent growth in the housing market using the rent-to-price ratio: Evidence from the OECD countries

Tom Engsted and Thomas Pedersen ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We investigate the predictive power of the rent-to-price ratio for future real estate returns and rent growth in 18 OECD countries over the period 1970 to 2011. First, we document that in most countries returns are signi?cantly predictable by the rent-price ratio. An increase (decrease) in the ratio signals a future increase (decrease) in returns. Second, there are large cross-country di¤erences in how the rent-price ratio predicts rent growth. For some countries the direction of predictability is negative, for other countries it is positive. Third, the predictive patterns are highly dependent on whether returns and rents are measured in nominal or real terms. Finally, there is some evidence of sub-sample instability in the predictive patterns, especially wrt. rent growth predictability. The predictability tests are conducted within a restricted VAR framework based on the dynamic Gordon growth model. This model implies restrictions across the VAR parameters that can be used to construct powerful tests of predictability.

Keywords: Real estate predictability; dynamic Gordon growth model; rent-price ratio; VAR model; OECD countries (search for similar items in EconPapers)
JEL-codes: C32 G12 R31 (search for similar items in EconPapers)
Pages: 43
Date: 2012-12-17
New Economics Papers: this item is included in nep-cwa, nep-for and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2012-58

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