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Why have house prices risen so much more than rents in superstar cities?

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  • Christian A. L. Hilber
  • Andreas Mense

Abstract

In most countries - particularly in supply constrained superstar cities - house prices have risen much more strongly than rents over the last two decades. We provide an explanation that does not rely on falling interest rates, changing credit conditions, unrealistic expectations, rising inequality, or global investor demand. Our model distinguishes between short- and long-run supply constraints and assumes housing demand shocks exhibit serial correlation. Employing panel data for England, our instrumental variable-fixed effect estimates suggest that in Greater London labor demand shocks in conjunction with supply constraints explain two-thirds of the 153% increase in the price-to-rent ratio between 1997 and 2018.

Suggested Citation

  • Christian A. L. Hilber & Andreas Mense, 2021. "Why have house prices risen so much more than rents in superstar cities?," CEP Discussion Papers dp1743, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1743
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    Cited by:

    1. Christian A. L. Hilber & Olivier Schoni, 2022. "Housing policy and affordable housing," CEP Occasional Papers 56, Centre for Economic Performance, LSE.
    2. Molloy, Raven & Nathanson, Charles G. & Paciorek, Andrew, 2022. "Housing supply and affordability: Evidence from rents, housing consumption and household location," Journal of Urban Economics, Elsevier, vol. 129(C).
    3. Paul Cheshire & Christian A. L. Hilber & Olivier Schöni, 2021. "The pandemic and the housing market: a British story," CEP Covid-19 Analyses cepcovid-19-020, Centre for Economic Performance, LSE.
    4. Gabriel Ahlfeldt & Stephan Heblich & Tobias Seidel, 2021. "Micro-Geographic Property Price and Rent Indices," CESifo Working Paper Series 9187, CESifo.
    5. Büchler, Simon & Ehrlich, Maximilian v. & Schöni, Olivier, 2021. "The amplifying effect of capitalization rates on housing supply," Journal of Urban Economics, Elsevier, vol. 126(C).
    6. Mense, Andreas, 2021. "Secondary housing supply," FAU Discussion Papers in Economics 05/2021, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    7. Francisco Amaral & Martin Dohmen & Sebastian Kohl & Moritz Schularick, 2021. "Superstar Returns," ECONtribute Discussion Papers Series 131, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    house prices; housing rents; price-to-rent ratio; price and rent dynamics; housing supply; land use regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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