RENTAL RATES UNDER HOUSING PRICE UNCERTAINTY: A REAL OPTIONS APPROACH

44 Pages Posted: 27 Nov 2013 Last revised: 28 Jul 2022

Date Written: June 19, 2014

Abstract

This working paper was written by Honglin Wang (Hong Kong Institute for Monetary Research), Fan Yu (Claremont McKenna College) and Yinggang Zhou (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research).

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

Hong Kong Institute for Monetary and Financial Research, RENTAL RATES UNDER HOUSING PRICE UNCERTAINTY: A REAL OPTIONS APPROACH (June 19, 2014). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 24/2013, Available at SSRN: https://ssrn.com/abstract=2360462 or http://dx.doi.org/10.2139/ssrn.2360462

Hong Kong Institute for Monetary and Financial Research (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

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