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House prices and rents in Spain: does the discount factor matter?

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Author Info
Juan Ayuso () (Banco de España)
Fernando Restoy () (Banco de España)
Abstract

We estimate alternative price to rent ratios in the Spanish housing market by considering different stochastic discount factors in present value models similar to those used in the financial literature but where the higher rigidity that characterises this market is taken into account. We identify three robust across model regularities: i) the increase in the price to rent ratio since the late nineties helped at first to restore equilibrium, ii) further increases in house prices raised the ratio between 24% and 32% above equilibrium by 2004, although iii) at that time the ratio was only around 2% above its short term adjustment path towards a (new) long run equilibrium.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0609e.pdf
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File Function: First version, April 2006
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Paper provided by Banco de España in its series Banco de España Working Papers with number 0609.

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Length: 34 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:bde:wpaper:0609

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Related research
Keywords: housing; price-to-rent ratio; overvaluation;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand
R31 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets

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  1. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June. [Downloadable!] (restricted)
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  2. Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers 3015, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May. [Downloadable!] (restricted)
    Other versions:
  4. Canova, Fabio & Marrinan, Jane, 1996. "Reconciling the term structure of interest rates with the consumption-based ICAP model," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 709-750, April. [Downloadable!] (restricted)
  5. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York. [Downloadable!]
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  6. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March. [Downloadable!] (restricted)
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  7. Pietro Catte & Nathalie Girouard & Robert Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD, Economics Department. [Downloadable!]
  8. Ayuso, Juan & Restoy, Fernando, 2006. "House prices and rents: An equilibrium asset pricing approach," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 371-388, June. [Downloadable!] (restricted)
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  11. Kenny, Geoff, 1999. "Asymmetric Adjustment Costs and The Dynamics of Housing Supply," Research Technical Papers 3/RT/99, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
  12. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Rodriguez, Rosa & Restoy, Fernando & Pena, J. Ignacio, 2002. "Can output explain the predictability and volatility of stock returns?," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 163-182, April. [Downloadable!] (restricted)
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    Other versions:
  15. John Krainer, 2003. "House price bubbles," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 7. [Downloadable!]
  16. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January. [Downloadable!] (restricted)
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