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Abstract
This paper analyses price–rent (PR) ratios under different housing career structures. A housing market with three segments for owner-occupation and a segment with rental housing is applied. A housing career is characterized by how households move between rentals and owner-occupied housing. While rents are completely passed through to the house price index when rentals represent alternative housing to all forms of owner-occupation, non-constant PR ratios are derived from more realistic housing career structures. In the presence of equity induced up-trading housing markets dominated by family homes are likely to see short-term deviations in PR ratios exceeding those of housing markets dominated by starter homes.
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Notes
1. Various other aspects of the relationship between rents and house prices are analysed by, amongst others, Meese & Wallace (Citation1994), Ayuso & Restoy (Citation2006), Campbell, Davies, Gallin & Martin (Citation2006) and Davies, Lehnert & Martin (Citation2008).
2. A third alternative is a housing career which contains both up-trading and renting, and rentals serve as perfect substitutes for all types of owner-occupation. When it comes to rent pass-through this alternative only differs from our extremes with respect to scaling, determined by the share of households considering rentals as alternatives to home ownership in each market segment.