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Empirical application of the housing-market no-arbitrage condition: problems, solutions and a Finnish case study

Author

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  • Elias Oikarinen

    (Department of Economics, Turku School of Economics)

Abstract

The often used housing price-to-income and housing price-to-rent ratios are problematic in housing market analysis and may result in misleading conclusions. Instead, the no-arbitrage condition of housing market is a theoretically sound basis to evaluate if housing prices are misaligned. Unfortunately, empirical applica-tion of the no-arbitrage condition has notable complications. This article reviews these complications and suggests some solutions to them. The use of implied expected appreciation derived from the no-arbitrage condition is recommended. It is also claimed that the real appreciation is better to use than the nominal one in the no-arbitrage computations. Furthermore, the paper shows that the maintenance costs as a fraction of housing price vary substantially in time and location, which may significantly affect the equilibrium housing price level relative to rental prices. An empirical application of the no-arbitrage relation using data from ten Finnish cities shows that housing price level in 2007 was not based on high expected appreciation. This lowers the fears for a price bubble.

Suggested Citation

  • Elias Oikarinen, 2008. "Empirical application of the housing-market no-arbitrage condition: problems, solutions and a Finnish case study," Discussion Papers 39, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp39
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    File URL: http://www.ace-economics.fi/kuvat/dp%2039.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Housing; no-arbitrage condition; overpricing; user cost;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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