Demographic Trend, the Rent-to-Price Ratio and Predictability of the House Market

We characterize the relationship between the rent-to-price ratio and house market returns and rent growth in a model where the demographic variable, the middleaged to young ratio, captures the slowly evolving components in the rent-to-price ratio. To document the linkage between demographics and the rent-to-price ratio, we first use China’s household-level survey data to investigate how individuals’ housing demand varies among age cohorts. We then construct the demographic variable and propose a demographics-adjusted present value model. Using the data of China’s aggregate house market, we reveal that the demographics-adjusted rentto-price ratio has significant predictive power on returns and rent growth. Out-ofsample forecasting performance of the demographics-adjusted present value model dominates the benchmark models in predicting returns and rent growth