House prices and rents: An equilibrium asset pricing approach

Abstract

We use a relatively general intertemporal asset pricing model where housing services and consumption are non-separable to measure overvaluation of housing in relation to rents in Spain, the UK and the US. Part of the increase in real house prices during the late nineties can be seen as a return to equilibrium following some undershooting after previous price peaks. However, marked increases in house prices led to price-torent ratios above equilibrium by mid-2003 (around 30% above equilibrium in the UK, 20% in Spain and 10% in the US). Part of that overvaluation -particularly in Spain and the UK -may be attributable to the sluggishness of supply in the presence of large demand shocks in this market and/or the slow adjustment of observed rents.

The Relationship between Mortgage Markets and House Prices: Does Financial Instability Make the Difference?

“…The asset market approach (Brown et al, 1997;Holly and Jones, 1997;Martínez Pagés and Maza 2003, Ayuso and Restoy, 2006 is based either on inter-temporal equilibrium conditions, or on the weaker requirement of absence of arbitrage opportunities. Financial market imperfections are excluded, but specific rigidities on the supply side of the economy may be encountered.…”

Determinants of House Prices in Nine Asia-Pacific Economies

“…To overcome these problems, two methods have been proposed. The first method is to compare observed price-rent ratios with time-varying discount factors that are determined by the user cost of owning a house, which consists of mortgage interest, property tax, maintenance cost, tax deductibility of mortgage interest payments and an additional risk premium (see Himmelbert et al, 2005;Ayuso and Restoy, 2006;Brunnermeier and Julliard, 2007). The second method is to compare observed house prices with fundamental values predicted based on the long-run relationship between house prices and macroeconomic factors (see, Abraham and Hendershott, 1996;Kalra et al, 2000;Capozza et al, 2002, for example).…”

An Analysis of the Influence of Property Tax on Housing Prices in the Apulia Region (Italy)

“…In general, high rents lead to an increased demand for housing in 'direct' use and, in a more marked form, for investment, resulting in a price increase [26][27][28].…”