Housing careers, P/R-ratios and rental equivalence

Abstract

This paper analyses price-rent ratios under different housing career structures. A housing market with three segments for owner-occupation and a segment with rental housing is applied while a housing career is characterised by how households move between rentals and owner-occupation. While rents are completely passed-through to aggregate house prices when rentals represent alternative housing to all forms of owner-occupation, more realistic housing career structures induce strict conditions for complete pass-through. In a heterogeneous housing market with equity induced up-trading complete pass-through is conditional on the ratio between market segments only indirectly affected by rent. This ratio is determined by the distribution of equity effects between market segments and the price elasticity of the different segments, and is therefore context specific. Stated differently, in most housing markets rents will not be completely passed through to house prices in the short-run.