Property Investment and Rental Rates Under Housing Price Uncertainty: A Real Options Approach

HKIMR Working Paper No.24/2013

44 Pages Posted: 27 Nov 2013 Last revised: 12 Oct 2015

See all articles by Honglin Wang

Honglin Wang

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

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Yinggang Zhou

Xiamen University - Department of Finance

Date Written: June 19, 2014

Abstract

The conventional wisdom that housing prices are the present value of future rents ignores the fact that rents are not discretionary as in dividends on stocks. Housing price uncertainty can affect household property investment, which in turn affects rent. By extending the theory of investment under uncertainty, we model the renter’s decision to buy a house and the landlord’s decision to sell as real options of waiting and examine real options effects on rent. Using data from Hong Kong and mainland China, we find significant a causal effect of housing prices on rents and draw important policy implications.

Keywords: Investment Under Uncertainty, Real Options, Housing Price, Rent, China

JEL Classification: G11, G12, G13

Suggested Citation

Wang, Honglin and Yu, Fan and Zhou, Yinggang, Property Investment and Rental Rates Under Housing Price Uncertainty: A Real Options Approach (June 19, 2014). HKIMR Working Paper No.24/2013. Available at SSRN: https://ssrn.com/abstract=2360462 or http://dx.doi.org/10.2139/ssrn.2360462

Honglin Wang (Contact Author)

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

3 Garden Road, 8th Floor
Hong Kong
China

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

Yinggang Zhou

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

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