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Rental Rates under Housing Price Uncertainty: A Real Options Approach

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Author Info

  • 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)

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    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.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 242013.

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    Length: 30 pages
    Date of creation: Nov 2013
    Date of revision:
    Handle: RePEc:hkm:wpaper:242013

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    Related research

    Keywords: Investment Under Uncertainty; Real Options; House Price; Rent; Causal Effect;

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