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Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach

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  • Honglin Wang
  • Fan Yu
  • Yinggang Zhou

Abstract

The conventional wisdom that housing prices are the present value of future rents ignores the fact that unlike dividends on stocks, rent is not discretionary. Housing price uncertainty can affect household property investments, which in turn affect rent. By extending the theory of investment under uncertainty, we model the renter's decision to buy a house and the landlord's decision to sell as the exercising of real options of waiting and examine real options effects on rent. Using data from Hong Kong and mainland China, we find a significant effect of housing price on rent and draw important policy implications.

Suggested Citation

  • Honglin Wang & Fan Yu & Yinggang Zhou, 2020. "Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(2), pages 633-665, June.
    • Handle: RePEc:bla:reesec:v:48:y:2020:i:2:p:633-665
    DOI: 10.1111/1540-6229.12235
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    2. Jenny Jing Wang & Jianfu Shen & Frederik Pretorius, 2023. "Valuing options to renew at future market value: the case of commercial property leases," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-35, December.
    3. Gang‐Zhi Fan & Ming Pu & Tien Foo Sing & Xiaoyu Zhang, 2022. "Risk aversion and urban land development options," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 767-788, September.
    4. Nhlabathi Mthobisi & Mgiba Freddy Marilahimbilu & Ligaraba Neo, 2022. "Social Media Marketing Attributes, Sandton’s Rental Market Brand Image, and the Millennials’ Rental Preference: An Empirical Study," Real Estate Management and Valuation, Sciendo, vol. 30(1), pages 34-52, March.
    5. Lee, Hung-Wei & Lin, Che-Chun & Tsai, I-Chun, 2023. "Another application of call options: Explaining the divergence between the housing market and the rental market," Finance Research Letters, Elsevier, vol. 53(C).
    6. Amir Ahmad Dar & Mohammad Shahfaraz Khan & Imran Azad & Amit Kumar Pathak & Gopu Jayaraman, 2024. "Literature review: options and its applications," SN Business & Economics, Springer, vol. 4(8), pages 1-26, August.

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