Predicting Returns and Rent Growth in the Housing Market Using the Rent-to-Price Ratio: Evidence from the OECD Countries

33 Pages Posted: 19 Dec 2012 Last revised: 1 Feb 2015

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Thomas Quistgaard Pedersen

Aarhus University - CREATES

Date Written: January 15, 2015

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.

Keywords: Housing market predictability, dynamic Gordon growth model, rent-price ratio, VAR model, expectations, money illusion, OECD countries

JEL Classification: C32, G12, R31

Suggested Citation

Engsted, Tom and Pedersen, Thomas Quistgaard, Predicting Returns and Rent Growth in the Housing Market Using the Rent-to-Price Ratio: Evidence from the OECD Countries (January 15, 2015). Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2190281 or http://dx.doi.org/10.2139/ssrn.2190281

Tom Engsted

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Thomas Quistgaard Pedersen (Contact Author)

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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