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Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market

  • Robert J. Hill

    ()

    ( Karl-Franzens University of Graz)

  • Iqbal A. Syed

    ()

    (University of New South Wales)

Disequilibrium in the housing market can be detected by comparing the actual price-rent ratio with its equilibrium counterpart obtained from the user-cost condition. Empirical implementation of this idea, however, is problematic because of quality differences between sold and rented dwellings. We develop a hedonic method that resolves this problem even in the presence of omitted variables. Applying this method to a data set consisting of 730,000 individual price and rent transactions we find that quality adjusting significantly reduces the actual price-rent ratio. We then insert these quality adjusted price-rent ratios into the user cost condition to check for departures from equilibrium.

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Paper provided by University of Graz, Department of Economics in its series Graz Economics Papers with number 2014-03.

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Date of creation: Mar 2014
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Handle: RePEc:grz:wpaper:2014-03
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