Rental Adjustment and Housing Prices: Evidence from Hong Kong's Residential Property Market

HKIMR Working Paper No.01/2013

29 Pages Posted: 30 Jan 2013

See all articles by Honglin Wang

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Weihang Dai

The Chinese University of Hong Kong (CUHK)

Date Written: January 17, 2013

Abstract

This paper investigates the interaction between housing prices and housing rentals. Standard economic models treat housing prices as the present discounted value of future rentals with the latter treated as exogenous. Casual observation, however, suggests that changes in rental prices often follow housing price changes. Economic theory also supports the view that rental prices may not be exogenous. Extending the user-cost model of house price determination, we propose that expected returns on alternative investments contribute positively to the rental adjustment process. We estimate an empirical model for Hong Kong house prices and show that a 1% change in the gap between rental yields and equilibrium whole economy capital returns, the return gap, implies a 0.30% change in real rents. One policy implication is that price changes in the housing market can impact the rental adjustment process by changing the return gap. Consequently, variation in the price-to-rent ratio, which is often used to measure the divergence of housing prices from their equilibrium level can underestimate the size of any housing market ‘bubble’.

Keywords: Rental Adjustment, Residential Property Market, Price-To-Rent Ratio

Suggested Citation

Wang, Honglin and Zhang, Chu and Dai, Weihang, Rental Adjustment and Housing Prices: Evidence from Hong Kong's Residential Property Market (January 17, 2013). HKIMR Working Paper No.01/2013. Available at SSRN: https://ssrn.com/abstract=2202578 or http://dx.doi.org/10.2139/ssrn.2202578

Honglin Wang (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Weihang Dai

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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