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The Journal of Real Estate Finance and Economics
Published in: The Journal of Real Estate Finance and Economics 1/2021

27-11-2019

House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach

Authors: Kieran McQuinn, Teresa Monteiro, Conor O’Toole

Published in: The Journal of Real Estate Finance and Economics | Issue 1/2021

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Abstract

The user cost of capital model is a popular tool for assessing the sustainability of house price movements. However, a number of issues typically arise when the approach is applied including the absence of information on consumer price expectations, differences in quality between owner-occupied and rented dwellings and whether agents expectations are rational. In this paper, using a new, unique database of regional housing variables we address these issues in assessing the sustainability of Irish house price changes between 2010 and 2018. We draw on a regular and timely survey of subjective house price expectations amongst Irish households to compile regional-specific user cost of capital variables. In examining the relationship between the user cost of capital and house price to rent ratios, we use developments in local labour markets to establish whether these expectations are determined by economic ``fundamentals” and, hence, not subject to a ``bubble”. Drawing on finance theory, we also present a series of indicators aimed at evaluating the sustainability of price movements.
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Footnotes
3
All house prices and rents are seasonally adjusted using the U.S. Census Bureau X-12-ARIMA seasonal adjustment program.
 
5
Although the Census data are only available for certain years, we interpolate between the years.
 
7
The Q3 observation is used for 2018.
 
8
Note in estimating the house price expectations equation we also include more general sentiment indicators for the overall economy. However, we do not find that any of these variables are significant (a general sentiment variable was included along with expectations for future labour market prospects and future household financial considerations.).
 
9
This involves regressing the change in the residuals from (7) on its lagged value and testing whether the coefficient on the lagged value is statistically significant from 0.5
 
10
The number of tenancies is obtained from the Rental Tenancy Board (RTB), while the number of house sales is from the Central Statistics Office (CSO).
 
11
Branch and Evans (2011) show this using an asset pricing model with least-squares learning in the context of stock markets.
 
12
Fatas (2016) discusses these concepts in terms of the stock market.
 
13
An unemployment rate of approximately 4.5 to 5% in the Irish case.
 
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Metadata
Title
House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach
Authors
Kieran McQuinn
Teresa Monteiro
Conor O’Toole
Publication date
27-11-2019
Publisher
Springer US
Published in
The Journal of Real Estate Finance and Economics / Issue 1/2021
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI
https://doi.org/10.1007/s11146-019-09731-x

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