## 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 con-

sidered in a simple predictability of excess returns model with high sta-

tistical 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

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 con-

sidered in a simple predictability of excess returns model with high sta-

tistical 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 language | English |
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Place of Publication | Dundee |

Publisher | University of Dundee, Department of Economic Studies |

Number of pages | 21 |

Publication status | Published - 2015 |

### Publication series

Name | Dundee Discussion Papers in Economics |
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Publisher | University of Dundee, Department of Economic Studies |

No. | 285 |

ISSN (Print) | 1473-236x |