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Rental Rates under Housing Price Uncertainty: A Real Options Approach

Honglin Wang, Fan Yu and Yinggang Zhou
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Honglin Wang: Hong Kong Institute for Monetary Research
Fan Yu: Claremont McKenna College
Yinggang Zhou: The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research

No 242013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The conventional wisdom that house prices are the present value of future rents ignores the fact that rents are not discretionary as in dividends on stocks. Housing price uncertainty can affect household property investment, which in turn affects rent. By extending the theory of investment under uncertainty, we model the renter's decision to buy a house and the landlord's decision to sell as real options of waiting and examine real options effects on rent. Using unique data from Hong Kong, we find significant a causal effect of house prices on rents and draw important policy implications.

Keywords: Investment Under Uncertainty; Real Options; House Price; Rent; Causal Effect (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-11
New Economics Papers: this item is included in nep-dem and nep-ure
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