No abstract

Many in the housing literature argue that house prices and income are cointegrated. I show that the data do not support this view. Standard tests using 27 years of national-level data do not find evidence of cointegration. However, standard tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that are more powerful than their timeseries counterparts to test for cointegration in a panel of 95 metro areas over 23 years. Using a bootstrap approach to allow for cross-correlations in citylevel house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration. Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate.

I show that when house prices are high relative to rents (that is, when the rent-price ratio is low) changes in real rents tend to be larger than usual and changes in real prices tend to be smaller than usual. Standard error-correction models provide inconclusive results about the predictive power of the rent-price ratio at a quarterly frequency. I use a long-horizon