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

50 Pages Posted: 15 Feb 2018

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

Department of Finance at School of Economics (SOE), and Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Date Written: January 30, 2018

Abstract

The conventional wisdom that housing prices are the present value of future rents ignores the fact that unlike dividends on stocks, rent is not discretionary. Housing price uncertainty can affect household property investments, which in turn affect 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 the exercising of real options of waiting and examine real options effects on rent. Using data from Hong Kong and mainland China, we find a significant effect of housing price on rent and draw important policy implications.

Keywords: Investment under uncertainty, real options, housing price, rent, Hong Kong, China

JEL Classification: D81, E22, R31

Suggested Citation

Wang, Honglin and Yu, Fan and Zhou, Yinggang, Property Investment and Rental Rate Under Housing Price Uncertainty: A Real Options Approach (January 30, 2018). Real Estate Economics, Forthcoming; Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 3113143. Available at SSRN: https://ssrn.com/abstract=3113143

Honglin Wang

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 (Contact Author)

Department of Finance at School of Economics (SOE), and Wang Yanan Institute for Studies in Economics (WISE), Xiamen University ( email )

A403 Economic Building, Xiamen University
Xiamen, 361005
China

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