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House prices and rents: an equilibrium asset pricing approach

Author

Listed:
  • Juan Ayuso

    (Banco de España)

  • Fernando Restoy

    (Banco de España)

Abstract

In this paper we use a relatively general intertemporal asset pricing model where housing services and consumption are non-separable to obtain a measure of the potential overvaluation of housing in relation to rents in Spain, the United Kingdom and the United States. The results show that part of the increase in real house prices during the late nineties can be seen as a return to equilibrium following some undershooting of house prices after previous peaks. However, more recently, marked increases in house prices have led price-to-rent ratios to well above equilibrium in all three countries by 2002. More specifically, the price-to-rent ratios were around 20% above equilibrium in Spain and the UK, and around 7% in the US. Part of that overvaluation "particularly in Spain and the UK" may be attributable to the sluggishness of supply in the presence of large demand shocks in this market and/or the slow adjustment of observed rents to the conditions prevailing in the housing market.

Suggested Citation

  • Juan Ayuso & Fernando Restoy, 2003. "House prices and rents: an equilibrium asset pricing approach," Working Papers 0304, Banco de España.
  • Handle: RePEc:bde:wpaper:0304
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    References listed on IDEAS

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    Cited by:

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    3. Salá Rios, Mercè, 2004. "Análisis territorial de la accesibilidad a la vivienda en España," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 22, pages 1-21, Diciembre.
    4. Patricia Fraser & Martin Hoesli & Lynn McAlevey, 2008. "House Prices and Bubbles in New Zealand," The Journal of Real Estate Finance and Economics, Springer, vol. 37(1), pages 71-91, July.
    5. Arrazola, María & de Hevia, José & Romero, Desiderio & Sanz-Sanz, José Félix, 2014. "Determinants of the Spanish housing market over three decades and three booms: Long run supply and demand elasticities," Working Paper Series 3604, Victoria University of Wellington, Chair in Public Finance.
    6. Daniel Fernández-Kranz & Mark Hon, 2006. "A Cross-Section Analysis of the Income Elasticity of Housing Demand in Spain: Is There a Real Estate Bubble?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 449-470, June.
    7. Gavin Cameron & John Muellbauer & Anthony Murphy, 2006. "Was There A British House Price Bubble? Evidence From A Regional Panel," ERES eres2006_150, European Real Estate Society (ERES).
    8. International Monetary Fund, 2006. "Spain: Financial Sector Assessment Program: Technical Note: Housing Prices, Household Debt, and Financial Stability," IMF Staff Country Reports 2006/210, International Monetary Fund.
    9. José Francisco Bellod Redondo, 2011. "Detección de burbujas inmobiliarias: el caso español," Contribuciones a la Economía, Servicios Académicos Intercontinentales SL, issue 2011-05, May.
    10. Sabine Le Bayon, 2006. "La croissance espagnole est-elle soutenable ?," Sciences Po publications info:hdl:2441/2822, Sciences Po.
    11. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    12. Gavin Cameron & John Muellbauer & Anthony Murphy, 2005. "Booms, Busts and Ripples in British Regional Housing Markets," Macroeconomics 0512003, University Library of Munich, Germany.
    13. Kurz, Claudia & Hoffmann, Johannes, 2004. "A rental-equivalence index for owner-occupied housing in West Germany 1985 to 1998," Discussion Paper Series 1: Economic Studies 2004,08, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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