Relationship between Price and Rent in the Real Estate Market and Stability Analysis: A Theoretical Approach

In recent times, volatility in the housing market has become an issue of great macroeconomic concern. Various efforts have been made to detect existence of bubbles and estimate their severity. The present study attempts to find out the possible economic reasons behind housing market instability and to understand the role of a regulatory authority in arresting the same. The study finds that there are possibilities of a housing market being stable in the sense that it attains stability by itself. A regulator’s role becomes important when a market does not follow a self-corrective model to reach equilibrium by itself. If, however, the regulator can once successfully place the market on the stable path, it by its own reaches equilibrium and does not move further until some exogenous shock disturbs the system.