Working Paper: NBER ID: w31013
Authors: Lara Loewenstein; Paul S. Willen
Abstract: We study the joint evolution of prices and rents of residential property. After constructing rent and price indices for renter- and owner-occupied properties, we decompose the change in the price of occupant-owned property into (1) changes in rent, (2) changes in the relative prices of investor- and occupant-owned properties, and (3) changes in the price-rent ratio. Via a simple model, we link our decomposition to different sources of variation in house prices. We argue that while the 2000s boom was plausibly driven by exuberant expectations, the boom of the 2020s more likely resulted from a preference shock.
Keywords: house prices; rents; housing market; price-rent ratio
JEL Codes: E30; E32; H31; R30; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive expectation shocks (D84) | higher price-rent ratios (R21) |
| expectation shocks (D84) | speculative bubbles (D84) |
| preference shocks (D11) | increase in rents (R21) |
| preference shocks (D11) | increase in prices (E31) |
| housing supply shocks (R31) | affect rents (R21) |
| housing supply shocks (R31) | affect prices (E30) |
| high supply growth prior to 2008 (N11) | low rent growth (R31) |
| low supply growth (O42) | high rent growth (R21) |
| reallocation shocks (J69) | impact rents (R33) |
| reallocation shocks (J69) | impact prices (P22) |