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Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries

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  • Engsted, Tom
  • Pedersen, Thomas Q.

Abstract

We conduct a comprehensive international study of predictability in housing markets using the rent-price ratio as a predictive variable. On data from 18 OECD countries we generally find return predictability in accordance with time-varying risk-premia, but we also document two puzzles. First, there is a highly unstable predictive pattern in rent growth across countries and time periods. Second, the predictive patterns are highly dependent on whether housing returns and rents are measured in nominal or real terms. These results are difficult to reconcile with fully rational expectations. Among other things, the results indicate that housing markets in many countries suffer from money illusion.

Suggested Citation

  • Engsted, Tom & Pedersen, Thomas Q., 2015. "Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 257-275.
    • Handle: RePEc:eee:jimfin:v:53:y:2015:i:c:p:257-275
    DOI: 10.1016/j.jimonfin.2015.02.001
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    More about this item

    Keywords

    Housing market predictability; Dynamic Gordon growth model; Rent-price ratio; VAR model; Expectations; Money illusion; OECD countries;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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