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Testing for Persistence in Housing Price-to-Income and Price-to-Rent Ratios in 16 OECD Countries

  • Christophe Andre

    ()

    (Economics Department, Organisation for Economic Co-operation and Development (OECD))

  • Luis A. Gil-Alana

    ()

    (University of Navarra, Faculty of Economics, Edificio Biblioteca, Entrada Este, E-31080 Pamplona, Spain)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

Housing price-to-income and price-to-rent ratios are among the most widely monitored indicators of housing market conditions. While these ratios tend to fluctuate around a constant level or a mild trend over the long term, they also tend to deviate from these benchmarks for protracted periods. Traditional unit root tests often indicate the presence of a unit root. This paper uses the framework of fractional integration to test the persistence of price-to-income and price-to-rent ratios in a sample of 16 OECD countries spanning four decades. The results indicate that the ratios are highly persistent. The possibility that persistence estimates may be affected by structural breaks in the series is also considered, but evidence of such breaks is found only in a very limited number of cases. Policy action may be required if high price-to-income and price-to-rent ratios have adverse social and economic consequences. Policies should be guided by a careful analysis of the factors behind high ratios.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201321.

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Length: 18 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:pre:wpaper:201321
Contact details of provider: Postal: PRETORIA, 0002
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://www.up.ac.za/economics

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  1. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  2. Edward L. Glaeser & Joseph Gyourko, 2007. "Arbitrage in Housing Markets," NBER Working Papers 13704, National Bureau of Economic Research, Inc.
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  9. Luis A. Gil-Alana & S.G. Brian Henry, 2003. "Fractional Integration and the Dynamics of UK Unemployment," Faculty Working Papers 10/03, School of Economics and Business Administration, University of Navarra.
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  11. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
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  14. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
  15. Barros, Carlos Pestana & Gil-Alana, Luis A. & Payne, James E., 2012. "Comovements among U.S. state housing prices: Evidence from fractional cointegration," Economic Modelling, Elsevier, vol. 29(3), pages 936-942.
  16. Sowell, Fallaw, 1992. "Modeling long-run behavior with the fractional ARIMA model," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 277-302, April.
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