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The Long-Run Relationship Between House Prices and Rents

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Author Info
Joshua Gallin
Abstract

I use standard error-correction models and long-horizon regression models to examine how well the rent-price ratio predicts future changes in real rents and prices. I find evidence that the rent-price ratio helps predict changes in real prices over 4-year periods, but that the rent-price ratio has little predictive power for changes in real rents over the same period. I show that a long-horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk, and I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent-price ratio is an indicator of valuation in the housing market. Copyright 2008 American Real Estate and Urban Economics Association

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6229.2008.00225.x
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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 36 (2008)
Issue (Month): 4 (December)
Pages: 635-658
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Handle: RePEc:bla:reesec:v:36:y:2008:i:4:p:635-658

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  1. Paul Hiebert & Matthias Sydow, 2009. "What drives returns to euro area housing? Evidence from a dynamic dividend-discount model," Working Paper Series 1019, European Central Bank. [Downloadable!]
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