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The Long‐Run Relationship Between House Prices and Rents
Author(s) -
Gallin Joshua
Publication year - 2008
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2008.00225.x
Subject(s) - economics , economic rent , econometrics , valuation (finance) , predictive power , unit root , yield (engineering) , random walk , empirical evidence , microeconomics , financial economics , statistics , mathematics , philosophy , materials science , epistemology , metallurgy , finance
I use standard error‐correction models and long‐horizon regression models to examine how well the rent–price ratio predicts future changes in real rents and prices. I find evidence that the rent–price ratio helps predict changes in real prices over 4‐year periods, but that the rent–price ratio has little predictive power for changes in real rents over the same period. I show that a long‐horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk, and I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent–price ratio is an indicator of valuation in the housing market.