Abstract
Purpose: The Price-to-Rent ratio is often regarded as an important indicator for
measuring housing market imbalance and inefficiency. A central question is the extent to which house prices and rents form part of the same market and thus whether they respond similarly to parallel stimulus. If they are close proxies dynamically, then this provides valuable market intelligence, particularly where causal relationships are evident. This paper therefore examines the relationship between market and rental pricing to uncover the price switching dynamics of residential real estate property types and whether the deviation between market rents and prices are integrated over both the long- and short-term.
Methodology/approach: The paper employs cointegration, Wald exogeneity tests and Granger causality models to determine the existence, if any, of cointegration and lead-lag relationships between prices and rents within the Belfast property market, as well as the Price-to-Rent ratios amongst its five main property sub-markets over the time period M4 2014 to M12 2018.
Findings: The findings provide some novel insights in relation to the pricing dynamics within Belfast. Housing and rental prices are cointegrated suggesting that they tend to move in tandem in the long-run. It is further evident that in the short-run, the price series Granger-causes that of rents inferring that sales
price information unidirectionally diffuse to the rental market. Further, the findings on Price-to-Rent ratios reveal that the detached sector appears to Granger-cause those of other property types except apartments in both the short- and long-term, suggesting possible spill-over of pricing signals from the top-end to the lower strata of the market.
Originality: The importance of understanding the relationship between house prices and rental market performance has gathered momentum. Although the house price-rent ratio is widely used as an indicator of over and undervaluation in the housing market, surprisingly little is known about the theoretical relationship between the price-rent ratio across property types and their respective inter-relationships.
measuring housing market imbalance and inefficiency. A central question is the extent to which house prices and rents form part of the same market and thus whether they respond similarly to parallel stimulus. If they are close proxies dynamically, then this provides valuable market intelligence, particularly where causal relationships are evident. This paper therefore examines the relationship between market and rental pricing to uncover the price switching dynamics of residential real estate property types and whether the deviation between market rents and prices are integrated over both the long- and short-term.
Methodology/approach: The paper employs cointegration, Wald exogeneity tests and Granger causality models to determine the existence, if any, of cointegration and lead-lag relationships between prices and rents within the Belfast property market, as well as the Price-to-Rent ratios amongst its five main property sub-markets over the time period M4 2014 to M12 2018.
Findings: The findings provide some novel insights in relation to the pricing dynamics within Belfast. Housing and rental prices are cointegrated suggesting that they tend to move in tandem in the long-run. It is further evident that in the short-run, the price series Granger-causes that of rents inferring that sales
price information unidirectionally diffuse to the rental market. Further, the findings on Price-to-Rent ratios reveal that the detached sector appears to Granger-cause those of other property types except apartments in both the short- and long-term, suggesting possible spill-over of pricing signals from the top-end to the lower strata of the market.
Originality: The importance of understanding the relationship between house prices and rental market performance has gathered momentum. Although the house price-rent ratio is widely used as an indicator of over and undervaluation in the housing market, surprisingly little is known about the theoretical relationship between the price-rent ratio across property types and their respective inter-relationships.
| Original language | English |
|---|---|
| Journal | International Journal of Housing Markets and Analysis |
| Publication status | Accepted/In press - 19 Oct 2020 |
Keywords
- Price-to-Rent ratio
- housing markets
- Granger causality
- cointegration
- error correction model
