2025/11/15 by Christian A. L. Hilber, Christian A L Hilber, Andreas Mense
Economics, Econometrics and Finance · Social Sciences · #Housing Market and Economics #Regional Economics and Spatial Analysis #Global Urban Networks and Dynamics
paper · doi:10.1093/ej/ueaf124
Abstract In most countries, during the 2000s and 2010s, house prices rose substantially relative to rents. This trend, however, was not uniform across space or time. The price-to-rent ratio increased much more strongly in the countries’ superstar cities, surged during economic expansion periods, but fell during times of economic crisis. These stylised facts are consistent with a model that features spatial variation in the supply-price elasticity and autocorrelated local demand changes that trigger persistent changes in rent-growth expectations. The model predicts that in supply-inelastic locations, positive (negative) demand shocks trigger increases (decreases) in the price-to-rent ratio that last several years. Stronger demand-change persistence and lower discount rates amplify this effect. We test our model predictions using panel data for England. Our instrumental-variable first-difference estimates suggest that over half of the 153% increase in the price-to-rent ratio between 1997 and 2018 in Greater London can be explained by our mechanism.