Property Investment and Rental Rate Under Housing Price Uncertainty: A Real Options Approach
Real Estate Economics, Forthcoming
50 Pages Posted: 15 Feb 2018
Date Written: January 30, 2018
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: Suggested Citation