House prices, rental costs, and mortgage interest rates
Abstract
Studies have typically adopted the price-rent ratio to determine whether housing exuberance exists and the periods of imbalance between house prices and rental costs. Using the price-rent ratio to conduct tests without considering the effects of mortgage interest rates on user costs may overestimate episodes of exuberance. This study uses data of the overall housing market and those of 10 major metropolitan statistical areas (MSAs) in the United States from 1979Q1 to 2018Q1 to evaluate whether housing exuberance exists in the markets; the results indicate that all the MSAs experienced episodes of exuberance at different times and the overall housing U.S. market was overheated from 1998Q2 to 2007Q3. By considering mortgage rates and using the user-cost-rent ratio, we further determine that short-term housing exuberance emerged in only two MSAs, Los Angeles and Miami, in 2006Q2, which was followed by immediate corrections. Thus, the research results of this study signify that only use the price-rent ratio to determine whether or not rational housing tenure choice made by traders exists is not sufficient. This study provides evidence showing that the method incorporating mortgage interest rates tends to obtain an equilibrium relationship between the rental and housing markets, indicating interest rates play an important role in housing tenure choice.
First published online 31 May 2021
Keyword : housing tenure choice, episodes of exuberance, price-rent ratio, mortgage rate, US housing markets
How to Cite
Lin, C.-C., & Tsai, I.-C. (2021). House prices, rental costs, and mortgage interest rates. International Journal of Strategic Property Management, 25(5), 356–368. https://doi.org/10.3846/ijspm.2021.14966
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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https://doi.org/10.1177/0042098008089981
Bourassa, S. C., Hoesli, M. E., & Oikarinen, E. (2019). Measuring house price bubbles. Real Estate Economics, 47(2), 534–563. https://doi.org/10.1111/1540-6229.12154
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https://doi.org/10.1080/10835547.2010.12090281
Brunnermeier, M. K., & Julliard, C. (2008). Money illusion and housing frenzies. Review of Financial Studies, 21(1), 135–180. https://doi.org/10.1093/rfs/hhm043
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https://doi.org/10.1016/j.jimonfin.2015.02.001
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https://doi.org/10.3846/ijspm.2018.317
Genesove, D. (2003). The nominal rigidity of apartment rents.
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Himmelberg, C., Mayer, C., & Sinai, T. (2005). Assessing high house prices: bubbles, fundamentals and misperceptions. Journal of Economic Perspectives, 19(4), 67–92.
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Hoffmann, J., & Kurz-Kim, J.-R. (2006). Consumer price adjustment under the microscope: Germany in a period of low inflation (Bundesbank Series 1 Discussion Paper No. 2006, 16). https://ssrn.com/abstract=2785242
Kent, R. J. (1984). Housing tenure choice: evidence from time series. Journal of Urban Economics, 15(2), 195–209.
https://doi.org/10.1016/0094-1190(84)90014-7
Kishor, N. K., & Morley, J. (2015). What factors drive the pricerent ratio for the housing market? A modified present-value analysis. Journal of Economic Dynamics and Control, 58, 235–
249. https://doi.org/10.1016/j.jedc.2015.06.006
Leamer, E. E. (2002, June). Bubble trouble? Your home has a P/E ratio too. UCLA Anderson Forecast. http://www.uclaforecast.com/uploads/forecasts/2002/june/articles/bubble.asp
Mikhed, V., & Zemčík, P. (2009). Testing for bubbles in housing markets: a panel data approach. Journal of Real Estate Finance and Economics, 38(4), 366–386.
https://doi.org/10.1007/s11146-007-9090-2
Nowak, K., Gluszak, M., & Belniak, S. (2020). Dynamics and asymmetric rent adjustments in the office market in Warsaw. International Journal of Strategic Property Management, 24(6), 428–440. https://doi.org/10.3846/ijspm.2020.13647
Pavlidis, E., Yusupova, A., Paya, I., Peel, D., Martínez-García, E., Mack, A., & Grossman, V. (2016). Episodes of exuberance in housing markets: in search of the smoking gun. Journal of Real Estate Finance and Economics, 53(4), 419–449.
https://doi.org/10.1007/s11146-015-9531-2
Phillips, P. C. B., & Yu, J. (2011). Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2(3), 455–491. https://doi.org/10.3982/QE82
Phillips, P. C. B., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500. International Economic Review, 56(4), 1043–1078. https://doi.org/10.1111/iere.12132
Phillips, P. C. B., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s NASDAQ: when did exuberance escalate asset values. International Economic Review, 52(1), 201–226. https://doi.org/10.1111/j.1468-2354.2010.00625.x
Poterba, J. M. (1984). Tax subsidies to owner-occupied housing: an asset-market approach. Quarterly Journal of Economics, 99(4), 729–752. https://doi.org/10.2307/1883123
Poterba, J. M. (1991). House price dynamics: the role of tax policy and demography. Brookings Papers on Economic Activity, 1991(2), 143–203. https://doi.org/10.2307/2534591
Rapaport, C. (1992). Rent regulation and housing-market dynamics. American Economic Review, 82(2), 446–451. https://www.jstor.org/stable/2117442
Reichert, A. K. (1990). The impact of interest rates, income, and employment upon regional housing prices. Journal of Real Estate Finance and Economics, 3(4), 373–391.
https://doi.org/10.1007/BF00178859
Shi, S. (2007). Moving window unit root test: locating real estate price bubbles in Seoul apartment market [Master thesis]. Singapore Management University, Singapore.
http://ink.library.smu.edu.sg/etd_coll/28/
Shi, S. (2017). Speculative bubbles or market fundamentals? An investigation of US regional housing markets. Economic Modelling, 66, 101–111.
https://doi.org/10.1016/j.econmod.2017.06.002
Shimizu, C., Nishimura, K. G., & Watanabe, T. (2010). Residential rents and price rigidity: micro structure and macro consequences. Journal of the Japanese and International Economies, 24(2), 282–299. https://doi.org/10.1016/j.jjie.2009.12.006
Tabner, I. T. (2016). Buying versus renting – determinants of the net present value of home ownership for individual households. International Review of Financial Analysis, 48, 233–246. https://doi.org/10.1016/j.irfa.2016.10.004
Tsai, I-C. (2020). Price rigidity and vacancy rates: the framing effect on rental housing markets. Journal of Real Estate Finance and Economics (in press).
https://doi.org/10.1007/s11146-020-09791-4
Tsai, I-C., & Chiang, S.-H. (2019). Exuberance and spillovers in housing markets: evidence from first- and second-tier cities. Regional Science and Urban Economics, 77, 75–86.
https://doi.org/10.1016/j.regsciurbeco.2019.02.005
Xie, Y., & Liu, H. (2004). Price‐rent ratio in China’s housing market: proper interval, measurement and an empirical study. International Journal of Strategic Property Management, 8(2), 73–86. https://doi.org/10.3846/1648715X.2004.9637509
Zorn, P. M. (1988). An analysis of household mobility and tenure choice: an empirical study of Korea. Journal of Urban Economics, 24(2), 113–128. https://doi.org/10.1016/0094-1190(88)90034-4
André, C., Gupta, R., & Muteba Mwamba, J. W. (2019). Are housing price cycles asymmetric? Evidence from the US states and metropolitan areas. International Journal of Strategic Property Management, 23(1), 1–22.
https://doi.org/10.3846/ijspm.2019.6361
Been, V., Ellen, I. G., & House, S. (2019). Laboratories of regulation: understanding the diversity of rent regulation laws. Fordham Urban Law Journal, 46(5), 1041–1079.
https://ir.lawnet.fordham.edu/ulj/vol46/iss5/1
Bourassa, S. C., & Yin, M. (2008). Tax deductions, tax credits and the homeownership rate of young urban adults in the United States. Urban Studies, 45(5–6), 1141–1161.
https://doi.org/10.1177/0042098008089981
Bourassa, S. C., Hoesli, M. E., & Oikarinen, E. (2019). Measuring house price bubbles. Real Estate Economics, 47(2), 534–563. https://doi.org/10.1111/1540-6229.12154
Bourassa, S. C., Hoesli, M. E., & Scognamiglio, D. (2010). Housing finance, prices, and tenure in Switzerland. Journal of Real Estate Literature, 18(2), 261–282.
https://doi.org/10.1080/10835547.2010.12090281
Brunnermeier, M. K., & Julliard, C. (2008). Money illusion and housing frenzies. Review of Financial Studies, 21(1), 135–180. https://doi.org/10.1093/rfs/hhm043
Campbell, J. Y., & Shiller, R. J. (1988). Stock prices, earnings, and expected dividends. Journal of Finance, 43(3), 661–676. https://doi.org/10.2307/2328190
Campbell, J. Y., & Shiller, R. J. (1998). Valuation ratios and the long-run stock market outlook. Journal of Portfolio Management, 24(2), 11–26. https://doi.org/10.3905/jpm.24.2.11
Campbell, S. D., Davis, M. A., Gallin, J., & Martin, R. F. (2009). What moves housing markets: a variance decomposition of the rent-price ratio. Journal of Urban Economics, 66(2), 90–102. https://doi.org/10.1016/j.jue.2009.06.002
Chen, A. (1996). China’s urban housing reform: price-rent ratio and market equilibrium. Urban Studies, 33(7), 1077–1092. https://doi.org/10.1080/00420989650011519
Chu, F.-N., & Tsai, I-C. (2020). Do higher house prices indicate higher safety? Price volatility risk in major cities in Taiwan. International Journal of Strategic Property Management, 24(3), 165–181. https://doi.org/10.3846/ijspm.2020.12159
Engsted, T., & Pedersen, T. Q. (2015). Predicting returns and rent growth in the housing market using the rent-price ratio: evidence from the OECD countries. Journal of International Money and Finance, 53, 257–275.
https://doi.org/10.1016/j.jimonfin.2015.02.001
Engsted, T., Hviid, S. J., & Pedersen, T. Q. (2016). Explosive bubbles in house prices? Evidence from the OECD countries. Journal of International Financial Markets, Institutions and Money, 40, 14–25. https://doi.org/10.1016/j.intfin.2015.07.006
Feng, Q., & Wu, G. L. (2015). Bubble or riddle? An asset-pricing approach evaluation on China’s housing market. Economic Modelling, 46, 376–383.
https://doi.org/10.1016/j.econmod.2015.02.004
Fonseca, M. B. F., Ferreira, F. A., Fang, W., & Jalali, M. S. (2018). Classification and selection of tenants in residential real estate: a constructivist approach. International Journal of Strategic Property Management, 22(1), 1–11.
https://doi.org/10.3846/ijspm.2018.317
Genesove, D. (2003). The nominal rigidity of apartment rents.
Review of Economics and Statistics, 85(4), 844–853.
https://doi.org/10.1162/003465303772815763
Hamilton, J. D. (1986). On testing for self-fulfilling speculative price bubbles. International Economic Review, 27(3), 545–552. https://doi.org/10.2307/2526680
Hill, R. J., & Syed, I. A. (2016). Hedonic price-rent ratios, user cost, and departures from equilibrium in the housing market. Regional Science and Urban Economics, 56, 60–72.
ttps://doi.org/10.1016/j.regsciurbeco.2015.11.001
Himmelberg, C., Mayer, C., & Sinai, T. (2005). Assessing high house prices: bubbles, fundamentals and misperceptions. Journal of Economic Perspectives, 19(4), 67–92.
https://doi.org/10.1257/089533005775196769
Hoffmann, J., & Kurz-Kim, J.-R. (2006). Consumer price adjustment under the microscope: Germany in a period of low inflation (Bundesbank Series 1 Discussion Paper No. 2006, 16). https://ssrn.com/abstract=2785242
Kent, R. J. (1984). Housing tenure choice: evidence from time series. Journal of Urban Economics, 15(2), 195–209.
https://doi.org/10.1016/0094-1190(84)90014-7
Kishor, N. K., & Morley, J. (2015). What factors drive the pricerent ratio for the housing market? A modified present-value analysis. Journal of Economic Dynamics and Control, 58, 235–
249. https://doi.org/10.1016/j.jedc.2015.06.006
Leamer, E. E. (2002, June). Bubble trouble? Your home has a P/E ratio too. UCLA Anderson Forecast. http://www.uclaforecast.com/uploads/forecasts/2002/june/articles/bubble.asp
Mikhed, V., & Zemčík, P. (2009). Testing for bubbles in housing markets: a panel data approach. Journal of Real Estate Finance and Economics, 38(4), 366–386.
https://doi.org/10.1007/s11146-007-9090-2
Nowak, K., Gluszak, M., & Belniak, S. (2020). Dynamics and asymmetric rent adjustments in the office market in Warsaw. International Journal of Strategic Property Management, 24(6), 428–440. https://doi.org/10.3846/ijspm.2020.13647
Pavlidis, E., Yusupova, A., Paya, I., Peel, D., Martínez-García, E., Mack, A., & Grossman, V. (2016). Episodes of exuberance in housing markets: in search of the smoking gun. Journal of Real Estate Finance and Economics, 53(4), 419–449.
https://doi.org/10.1007/s11146-015-9531-2
Phillips, P. C. B., & Yu, J. (2011). Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2(3), 455–491. https://doi.org/10.3982/QE82
Phillips, P. C. B., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500. International Economic Review, 56(4), 1043–1078. https://doi.org/10.1111/iere.12132
Phillips, P. C. B., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s NASDAQ: when did exuberance escalate asset values. International Economic Review, 52(1), 201–226. https://doi.org/10.1111/j.1468-2354.2010.00625.x
Poterba, J. M. (1984). Tax subsidies to owner-occupied housing: an asset-market approach. Quarterly Journal of Economics, 99(4), 729–752. https://doi.org/10.2307/1883123
Poterba, J. M. (1991). House price dynamics: the role of tax policy and demography. Brookings Papers on Economic Activity, 1991(2), 143–203. https://doi.org/10.2307/2534591
Rapaport, C. (1992). Rent regulation and housing-market dynamics. American Economic Review, 82(2), 446–451. https://www.jstor.org/stable/2117442
Reichert, A. K. (1990). The impact of interest rates, income, and employment upon regional housing prices. Journal of Real Estate Finance and Economics, 3(4), 373–391.
https://doi.org/10.1007/BF00178859
Shi, S. (2007). Moving window unit root test: locating real estate price bubbles in Seoul apartment market [Master thesis]. Singapore Management University, Singapore.
http://ink.library.smu.edu.sg/etd_coll/28/
Shi, S. (2017). Speculative bubbles or market fundamentals? An investigation of US regional housing markets. Economic Modelling, 66, 101–111.
https://doi.org/10.1016/j.econmod.2017.06.002
Shimizu, C., Nishimura, K. G., & Watanabe, T. (2010). Residential rents and price rigidity: micro structure and macro consequences. Journal of the Japanese and International Economies, 24(2), 282–299. https://doi.org/10.1016/j.jjie.2009.12.006
Tabner, I. T. (2016). Buying versus renting – determinants of the net present value of home ownership for individual households. International Review of Financial Analysis, 48, 233–246. https://doi.org/10.1016/j.irfa.2016.10.004
Tsai, I-C. (2020). Price rigidity and vacancy rates: the framing effect on rental housing markets. Journal of Real Estate Finance and Economics (in press).
https://doi.org/10.1007/s11146-020-09791-4
Tsai, I-C., & Chiang, S.-H. (2019). Exuberance and spillovers in housing markets: evidence from first- and second-tier cities. Regional Science and Urban Economics, 77, 75–86.
https://doi.org/10.1016/j.regsciurbeco.2019.02.005
Xie, Y., & Liu, H. (2004). Price‐rent ratio in China’s housing market: proper interval, measurement and an empirical study. International Journal of Strategic Property Management, 8(2), 73–86. https://doi.org/10.3846/1648715X.2004.9637509
Zorn, P. M. (1988). An analysis of household mobility and tenure choice: an empirical study of Korea. Journal of Urban Economics, 24(2), 113–128. https://doi.org/10.1016/0094-1190(88)90034-4