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Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market

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  • Robert J. Hill

    ()
    ( Karl-Franzens University of Graz)

  • Iqbal A. Syed

    ()
    (University of New South Wales)

Abstract

Departures of the housing market from equilibrium can be detected by comparing the actual price-rent ratio with the user cost of owner occupying. Empirical implementation of this idea, however, is problematic for two reasons. First, the price-rent ratio needs to be quality adjusted. Second, the expected capital gain – an important input into the user cost formula – is not directly observable. Using a large data set for Sydney-Australia, we show how these problems can be resolved using hedonic methods. Otherwise the user cost approach can generate highly misleading results.

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Bibliographic Info

Paper provided by University of Graz, Department of Economics in its series Graz Economics Papers with number 2012-08.

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Date of creation: Dec 2012
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Handle: RePEc:grz:wpaper:2012-08

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Related research

Keywords: Real estate; Housing market; Hedonic model; Price-rent ratio; Rental yield; Quality adjustment; User cost; Capital gains;

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