Predicting returns and rent growth in the housing market using the rent-to-price ratio: Evidence from the OECD countries
AbstractWe 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.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-58.
Date of creation: 17 Dec 2012
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Real estate predictability; dynamic Gordon growth model; rent-price ratio; VAR model; OECD countries;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-CWA-2013-01-07 (Central & Western Asia)
- NEP-FOR-2013-01-07 (Forecasting)
- NEP-URE-2013-01-07 (Urban & Real Estate Economics)
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