Hedonic Price-Rent Ratios, User Cost, and Departures from Equilibrium in the Housing Market
47 Pages Posted: 6 Nov 2012
Date Written: October 15, 2012
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
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