[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/hkm/wpaper/242013.html
   My bibliography  Save this paper

Rental Rates under Housing Price Uncertainty: A Real Options Approach

Author

Listed:
  • Honglin Wang

    (Hong Kong Institute for Monetary Research)

  • Fan Yu

    (Claremont McKenna College)

  • Yinggang Zhou

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

Abstract
The conventional wisdom that house prices are the present value of future rents ignores the fact that rents are not discretionary as in dividends on stocks. Housing price uncertainty can affect household property investment, which in turn affects rent. By extending the theory of investment under uncertainty, we model the renter's decision to buy a house and the landlord's decision to sell as real options of waiting and examine real options effects on rent. Using unique data from Hong Kong, we find significant a causal effect of house prices on rents and draw important policy implications.

Suggested Citation

  • Honglin Wang & Fan Yu & Yinggang Zhou, 2013. "Rental Rates under Housing Price Uncertainty: A Real Options Approach," Working Papers 242013, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:242013
    as

    Download full text from publisher

    File URL: http://www.hkimr.org/uploads/publication/369/wp-no-24_2013-final-.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    2. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
    3. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, September.
    4. David Michayluk & Patrick J. Wilson & Ralf Zurbruegg, 2006. "Asymmetric Volatility, Correlation and Returns Dynamics Between the U.S. and U.K. Securitized Real Estate Markets," Published Paper Series 2006-5, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    6. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-1292, December.
    7. James M. Poterba, 1991. "House Price Dynamics: The Role of Tax Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 143-204.
    8. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    9. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, August.
    10. Albert Saiz, 2003. "Room in the Kitchen for the Melting Pot: Immigration and Rental Prices," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 502-521, August.
    11. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
    12. Kim, In Joon, 1990. "The Analytic Valuation of American Options," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-572.
    13. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
    14. Steven R. Grenadier, 2005. "An Equilibrium Analysis of Real Estate Leases," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1173-1214, July.
    15. David S. Bunch & Herb Johnson, 2000. "The American Put Option and Its Critical Stock Price," Journal of Finance, American Finance Association, vol. 55(5), pages 2333-2356, October.
    16. Ayuso, Juan & Restoy, Fernando, 2006. "House prices and rents: An equilibrium asset pricing approach," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 371-388, June.
    17. Sommer, Kamila & Sullivan, Paul & Verbrugge, Randal, 2013. "The equilibrium effect of fundamentals on house prices and rents," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 854-870.
    18. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, May.
    19. Rosen, Kenneth T & Smith, Lawrence B, 1983. "The Price-Adjustment Process for Rental Housing and the Natural Vacancy Rate," American Economic Review, American Economic Association, vol. 73(4), pages 779-786, September.
    20. Triantis, Alexander J & Hodder, James E, 1990. "Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-565, June.
    21. Wenlan Qian, 2013. "Why Do Sellers Hold Out in the Housing Market? An Option-Based Explanation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 41(2), pages 384-417, June.
    22. Hendershott, Patric H., 1996. "Rental Adjustment and Valuation in Overbuilt Markets: Evidence from the Sydney Office Market," Journal of Urban Economics, Elsevier, vol. 39(1), pages 51-67, January.
    23. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    24. David Michayluk & Patrick J. Wilson & Ralf Zurbruegg, 2006. "Asymmetric Volatility, Correlation and Returns Dynamics Between the U.S. and U.K. Securitized Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(1), pages 109-131, March.
    25. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    26. Honglin Wang & Chu Zhang & Weihang Dai, 2013. "Rental Adjustment and Housing Prices: Evidence from Hong Kong's Residential Property Market," Working Papers 012013, Hong Kong Institute for Monetary Research.
    27. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    28. Arthur A. Eubank & C. R. Sirmans, 1979. "The Price Adjustment Mechanism for Rental Housing in the United States," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(1), pages 163-168.
    29. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Honglin Wang & Fan Yu & Yinggang Zhou, 2020. "Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(2), pages 633-665, June.
    2. Honglin Wang & Chu Zhang & Weihang Dai, 2013. "Rental Adjustment and Housing Prices: Evidence from Hong Kong's Residential Property Market," Working Papers 012013, Hong Kong Institute for Monetary Research.
    3. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    4. Óscar J. Arce & David López-Salido, 2006. "House Prices, Rents, and Interest Rates under Collateral Constraints," Working Papers 0610, Banco de España.
    5. Yongqiang Chu, 2014. "Credit constraints, inelastic supply, and the housing boom," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 52-69, January.
    6. Wenli Li & Haiyong Liu & Fang Yang & Rui Yao, 2016. "Housing Over Time And Over The Life Cycle: A Structural Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1237-1260, November.
    7. Wang, Honglin & Yu, Fan & Zhou, Yinggang, 2018. "Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach," IRTG 1792 Discussion Papers 2018-051, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    8. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
    9. repec:esx:essedp:712 is not listed on IDEAS
    10. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    11. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    12. Aktham I. Maghyereh & Basil Awartani & Osama D. Sweidan, 2019. "Oil price uncertainty and real output growth: new evidence from selected oil-importing countries in the Middle East," Empirical Economics, Springer, vol. 56(5), pages 1601-1621, May.
    13. Halket, Jonathan & Pignatti Morano di Custoza, Matteo, 2015. "Homeownership and the scarcity of rentals," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 107-123.
    14. Steven R. Grenadier, 2003. "An Equilibrium Analysis of Real Estate," NBER Working Papers 9475, National Bureau of Economic Research, Inc.
    15. Miceli, Thomas J. & Sirmans, C.F., 2013. "Efficiency rents: A new theory of the natural vacancy rate for rental housing," Journal of Housing Economics, Elsevier, vol. 22(1), pages 20-24.
    16. Harry R. Clarke & William J. Reed, 1990. "Applications of Optimal Stopping in Resource Economics," The Economic Record, The Economic Society of Australia, vol. 66(3), pages 254-265, September.
    17. Michal Rubaszek, 2017. "Reforming housing rental market in a life-cycle model," KAE Working Papers 2017-028, Warsaw School of Economics, Collegium of Economic Analysis.
    18. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    19. repec:dau:papers:123456789/1046 is not listed on IDEAS
    20. Mehmet Balcilar & Zeynel Abidin Ozdemir, 2017. "The nexus between the oil price and its volatility in a stochastic volatility in mean model with time-varying parameters," Working Papers 15-33, Eastern Mediterranean University, Department of Economics.
    21. Balcilar, Mehmet & Ozdemir, Zeynel Abidin, 2019. "The nexus between the oil price and its volatility risk in a stochastic volatility in the mean model with time-varying parameters," Resources Policy, Elsevier, vol. 61(C), pages 572-584.
    22. Anson T. Y. Ho & Jie Zhou, 2016. "Housing and Tax-Deferred Retirement Accounts," Staff Working Papers 16-24, Bank of Canada.

    More about this item

    Keywords

    Investment Under Uncertainty; Real Options; House Price; Rent; Causal Effect;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:242013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: HKIMR (email available below). General contact details of provider: https://edirc.repec.org/data/hkimrhk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.