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Rent - Price and the Earnings Yield on Housing

Yong Kim
The dramatic rise and even more dramatic fall in U.S. house prices over the last several years has engendered much research to try to determine whether these events represent a house price “bubble,” where prices rose above their fundamental values and then collapsed. A key focus of this research is the behavior of rent-price ratios, which typically combine data on tenant rents and owner-occupied house prices to proxy the earnings yield on owner-occupied housing, much like an earnings-price ratio for a stock. Studies have found little correlation between movements in these ratios and their typical fundamental determinants (e.g., Campbell et al. 2007), leading many experts to conclude that houses were, indeed, overvalued (e.g. Case and Shiller 2004).