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Estimating the Rental Adjustment Process

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Author Info
Patric H. Hendershott
Bryan D. MacGregor
Raymond Y.C. Tse
Abstract

Rental adjustment equations have been estimated for a quarter century. In the U.S., models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the UK, drivers of the demand for space have dominated the estimation. The recent papers of Hendershott (1996) and Hendershott, Lizieri and Matysiak (HLM, 1999) fall into the former category. We re-estimate these equations using alternative formulations but can do little to improve them overall. However, we identify econometric concerns with the specifications. We then derive a model incorporating both supply and demand factors within an Error Correction framework, and show how the U.S. and UK traditions are special cases of this more general formulation. We next estimate this equation using data from the City of London office market. Our initial specification of this more generalized model is greatly superior to the vacancy rate model. Finally, we estimate a two-equation variant with a separate vacancy rate equation; this model also performs much better than that of HLM. Importantly, our model passes standard modern econometric requirements for unit roots and co-integration. We find little evidence of special or temporal variation in natural vacancy rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7912.

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Date of creation: Sep 2000
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Publication status: published as Hendershott, P. H., B. D. MacGregor and R. Y. C. Tse. "Estimation Of The Rental Adjustment Process," Real Estate Economics, 2002, v30(2,Summer), 165-183.
Handle: RePEc:nbr:nberwo:7912

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R0 - Urban, Rural, and Regional Economics - - General
R3 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Richard Arnott, 1997. "Rent Control," Boston College Working Papers in Economics 391., Boston College Department of Economics. [Downloadable!]
  2. Grenadier Steven R., 1995. "Local and National Determinants of Office Vacancies," Journal of Urban Economics, Elsevier, vol. 37(1), pages 57-71, January. [Downloadable!] (restricted)
  3. Eubank, Arthur A, Jr & Sirmans, C F, 1979. "The Price Adjustment Mechanism for Rental Housing in the United States," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 163-68, February. [Downloadable!] (restricted)
  4. Rosen, Kenneth T & Smith, Lawrence B, 1983. "The Price-Adjustment Process for Rental Housing and the Natural Vacancy Rate," American Economic Review, American Economic Association, vol. 73(4), pages 779-86, September. [Downloadable!] (restricted)
  5. Shilling, James D. & Sirmans, C. F. & Corgel, John B., 1987. "Price adjustment process for rental office space," Journal of Urban Economics, Elsevier, vol. 22(1), pages 90-100, July. [Downloadable!] (restricted)
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  1. Min Hwang & John Quigley, 2006. "Economic Fundamentals in Local Housing Markets: Evidence from U.S. Metropolitan Regions," Berkeley Program on Housing and Urban Policy, Working Paper Series 1050, Berkeley Program on Housing and Urban Policy. [Downloadable!]
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