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Rental Rates under Housing Price Uncertainty: A Real Options Approach

Author

Listed:
  • 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)

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.

Suggested Citation

  • Honglin Wang & Fan Yu & Yinggang Zhou, 2013. "Rental Rates under Housing Price Uncertainty: A Real Options Approach," Working Papers 242013, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:242013
    as

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    References listed on IDEAS

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    Keywords

    Investment Under Uncertainty; Real Options; House Price; Rent; Causal Effect;
    All these keywords.

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