The Housing Cycle : Rents versus Prices

Rents have been proposed as a fundamental determinant of house prices, and indeed deviations from a purported stable relationship between rents and prices have been used as measures of housing market froth, or bubbles. However, previous research has demonstrated that rents and prices are affected differently by fundamental factors. Apartments, for instance, take up less land than houses, and therefore rent and home price dynamics can differ. We thus examine the cyclical behavior of rents and house prices across a geographically dispersed set of cities for the United States. We find that house price cycles are in most cases more volatile than those for rents. In addition, rents across the different cities exhibit more cyclical co-movement than home prices, as the latter’s cycles are more idiosyncratic for different regions of the US. In addition, measures of house price and rent co-movement exhibit different dynamics, with peaks and troughs often occurring at very different times