Analysis of house price dynamics using the price-to-rent ratio: evidence from the Oslo housing market

Abstract

Housing prices in Oslo have risen significantly in recent decades, approaching historic levels. Specifically, in the last ten years, house prices in Oslo have experienced a remarkable appreciation of 90%, surpassing the 47% increase in rental prices. This paper aims to examine the long-run dynamics of house prices in Oslo by investigating the relationship between the price-to-rent ratio and relevant macroeconomic variables. A Johansen cointegration test and Vector error-correction model are applied to determine these relationships. The results provide evidence indicating the existence of a cointegrated relationship between the macroeconomic variables and the price-to-rent ratio. The estimated VECM suggests that real interest rate is the predominant driver, followed by population and disposable income. In the short-run, the price-to-rent ratio adjusts toward equilibrium with an adjustment speed of 28,52% per quarter. A shock to the debt-to-income ratio has the most significant effect on the price-to-rent ratio, while the ratio itself is the primary driver in determining its variability.