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House Prices and Rents: Micro Evidence from a Matched Dataset in Central London_x0003_

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  • Philippe Bracke

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    Abstract

    In this paper I study unit-level data on house prices and rents in Central London. I document the existence of systematic differences in price-rent ratios across property types within the same urban area: bigger properties and properties located in more expensive neighborhoods have higher price-rent ratios. My analysis is based on a unique new dataset: the records of a major Central London real estate agency. The dataset contains information on achieved prices and rents for tens of thousands of properties, as well as detailed descriptions of property characteristics. The period of analysis, 2005 to 2011, covers the last part of the housing boom, the bust of 2008, and the subsequent recovery. In terms of empirical methodology, I use hedonic regressions to estimate average prices and rents within cells of observationally equivalent properties. Since hedonic regressions cannot control for unobserved characteristics, I also run a restricted analysis with properties that are both sold and rented out within 6 months: in this way I am able to measure price-rent ratios directly. In the last part of the paper I discuss potential explanations for the differences in price-rent ratios. One possibility is that gross price-rent ratio disparities hide differences in maintenance costs or vacancy rates. Another possibility, related to the dividend pricing model, is that properties with higher price-rent ratios feature higher expected rent growth or lower risk premia. Contrary to this second view, I find that within Central London the rent growth rates of more expensive properties are not different from those of cheaper properties, but their volatility is significantly higher. This is consistent with a hedging model where higher rent volatility in some housing submarkets pushes people to buy in order to lock in future rents. In order to verify the above mechanisms, I use price and rent indexes derived from the hedonic regressions to estimate the growth and aggregate volatility of prices and rents for different property categories. Using data at the individual property level, I also measure idiosyncratic volatilities by restricting attention to properties that were sold or rented at least twice during the sample period. Since the expectations of agents might differ from the actual historical performance of house prices and rents, I complement my analysis with an expectation survey carried out through the mailing list of the real estate agency that provided the property data.

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    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa13/ERSA2013_paper_00112.pdf
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    Bibliographic Info

    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa13p112.

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    Date of creation: Nov 2013
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    Handle: RePEc:wiw:wiwrsa:ersa13p112

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    Related research

    Keywords: House prices; housing rents; price index;

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    1. Min Hwang & John Quigley & Jae-young Son, 2006. "The Dividend Pricing Model: New Evidence from the Korean Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 205-228, May.
    2. N. Gregory Mankiw & Ricardo Augusto Marc Rocha Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," Yale School of Management Working Papers ysm391, Yale School of Management.
    3. Morris A. Davis & Jonathan Heathcote, 2004. "The price and quantity of residential land in the United States," Finance and Economics Discussion Series 2004-37, Board of Governors of the Federal Reserve System (U.S.).
    4. Todd Sinai & Nicholas S. Souleles, 2003. "Owner-Occupied Housing as a Hedge Against Rent Risk," NBER Working Papers 9462, National Bureau of Economic Research, Inc.
    5. David Genesove, 2003. "The Nominal Rigidity of Apartment Rents," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 844-853, November.
    6. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
    7. Brent W. Ambrose & Piet Eichholtz & Thies Lindenthal, 2013. "House Prices and Fundamentals: 355 Years of Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 477-491, 03.
    8. Jonathan Halket & Matteo Pignatti, 2012. "Housing tenure choices with private information," Economics Discussion Papers 717, University of Essex, Department of Economics.
    9. 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.
    10. Robert J. Hill & Iqbal A. Syed, 2014. "Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market," Graz Economics Papers 2014-03, University of Graz, Department of Economics.
    11. Goetzmann, William N & Spiegel, Matthew, 1995. "Non-temporal Components of Residential Real Estate Appreciation," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 199-206, February.
    12. Clapp, John M & Giaccotto, Carmelo, 1992. "Estimating Price Trends for Residential Property: A Comparison of Repeat Sales and Assessed Value Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 357-74, December.
    13. Joshua Gallin, 2008. "The Long-Run Relationship Between House Prices and Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 635-658, December.
    14. Zvi Griliches, 1961. "Hedonic Price Indexes for Automobiles: An Econometric of Quality Change," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 173-196 National Bureau of Economic Research, Inc.
    15. Randal Verbrugge & Thesia I. Garner, 2009. "Reconciling User Costs and Rental Equivalence: Evidence from the U.S. Consumer Expenditure Survey," Working Papers 427, U.S. Bureau of Labor Statistics.
    16. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
    17. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    18. Banks, James & Blundell, Richard & Oldfield, Zoë & Smith, James P., 2010. "House Price Volatility and the Housing Ladder," IZA Discussion Papers 5173, Institute for the Study of Labor (IZA).
    19. Campbell, Sean D. & Davis, Morris A. & Gallin, Joshua & Martin, Robert F., 2009. "What moves housing markets: A variance decomposition of the rent-price ratio," Journal of Urban Economics, Elsevier, vol. 66(2), pages 90-102, September.
    20. repec:mcb:jmoncb:v:45:y:2013:i::p:477-491 is not listed on IDEAS
    21. Bar-Isaac, Heski & Gavazza, Alessandro, 2013. "Brokers' contractual arrangements in the Manhattan residential rental market," MPRA Paper 43967, University Library of Munich, Germany.
    22. Péter Hudomiet & Gábor Kézdi & Robert J. Willis, 2011. "Stock market crash and expectations of American households," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 393-415, 04.
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