Testing for predictive power of price/rent ratio for determining house prices in OECD countries

Abstract

We study the predictability of price and rent changes by rent-to-price ratio for 20 OECD countries over the period 1970 to 2017. To investigate the relationship we used Vector Error-Correction Model (VECM) and long-horizon model. We constructed bootstrapping procedures to address the issues of biased estimates from the long-horizon model. First, we found that for most countries prices do all the correcting over the long-run time range. Second, there are significant cross-country differences in how rent-to-price ratio defines future rent growth. Third, both models showed completely different results. We concluded that rent-to-price ratio is not a complete predictor of price and rents formations on these markets.