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The price–rent ratio inequality in Scottish Cities: fluctuations in discount rates and expected rent growth

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  • Dooruj Rambaccussing

    (University of Dundee)

Abstract

The price to rent ratio can be used to identify properties which are either overvalued or undervalued according to market fundamentals. Fluctuations in the price to rent ratio over time, can be traced to either changes in expectations of future house price growth (expected returns) or rental growth. In this paper, we measure the impact of these latent variables in Scotland’s main cities by implementing a state-space model based on the present value. The model estimates show that the proportion of expected rent growth and expected returns driving the price to rent ratio differs across Scotland. Glasgow seems to be driven mostly by expected returns, while rent growth drives price movements in Edinburgh. A geographic dimension is noted as cities on the East coast share similar expected returns and expected rent growth. Housing market trends in Scotland mostly follow the Edinburgh experience. Further decompositions show that house price changes are driven by an equal combination of expected rent growth and expected returns in Dundee and Aberdeen.

Suggested Citation

  • Dooruj Rambaccussing, 2021. "The price–rent ratio inequality in Scottish Cities: fluctuations in discount rates and expected rent growth," SN Business & Economics, Springer, vol. 1(9), pages 1-15, September.
    • Handle: RePEc:spr:snbeco:v:1:y:2021:i:9:d:10.1007_s43546-021-00116-y
    DOI: 10.1007/s43546-021-00116-y
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    More about this item

    Keywords

    State-space model; Present value; Scottish cities; Housing markets; Rent; Geography;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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