Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market

47 Pages Posted: 6 Nov 2012

See all articles by Robert J. Hill

Robert J. Hill

University of Graz

Iqbal A. Syed

UNSW Australia Business School, School of Economics

Date Written: October 15, 2012

Abstract

Departures of the housing market from equilibrium can be detected by comparing the actual price-rent ratio with the user cost of owner occupying. Empirical implementation of this idea, however, is problematic for two reasons. First, the price-rent ratio needs to be quality adjusted. Second, the expected capital gain -- an important input into the user cost formula -- is not directly observable. Using a large data set for Sydney-Australia, we show how these problems can be resolved using hedonic methods. Otherwise the user cost approach can generate highly misleading results.

Keywords: Real estate, Housing market, Hedonic model, Price-rent ratio, Rental yield, Quality adjustment, User cost, Capital gains

JEL Classification: C43, E01, E31, R31

Suggested Citation

Hill, Robert J. and Syed, Iqbal A., Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market (October 15, 2012). UNSW Australian School of Business Research Paper No. 2012-45. Available at SSRN: https://ssrn.com/abstract=2171090 or http://dx.doi.org/10.2139/ssrn.2171090

Robert J. Hill

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

Iqbal A. Syed (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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