Dundee Discussion Papers in Economics 285: Modelling housing prices using a present value state space model

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    Abstract

    This paper introduces a State Space approach to explain the dynamics of rent growth, expected returns and Price-Rent ratio in housing markets. According to the present value model, movements in price to rent ratio should be matched by movements in expected returns and expected rent growth. The state space framework assume that both variables follow an autoregressive process of order one. The model is applied to the US and UK housing market, which yields series of the latent variables given the behaviour of the Price-Rent ratio. Resampling techniques and boot-strapped likelihood ratios show that expected returns tend to be highly persistent compared to rent growth. The Öltered expected returns is considered in a simple predictability of excess returns model with high statistical predictability evidenced for the UK. Overall, it is found that the present value model tends to have strong statistical predictability in the UK housing markets.
    Original languageEnglish
    Place of PublicationDundee
    PublisherUniversity of Dundee
    Number of pages21
    Publication statusPublished - 2015

    Publication series

    NameDundee Discussion Papers in Economics
    PublisherUniversity of Dundee
    No.285
    ISSN (Print)1473-236x

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)
    • Economics and Econometrics
    • Finance

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