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House prices and rents: a reappraisal

Published online by Cambridge University Press:  04 December 2023

Bertrand Achou ,
Hippolyte d’Albis  and
Eleni Iliopulos Open the ORCID record for Eleni Iliopulos [Opens in a new window]
Bertrand Achou
Affiliation:
Faculty of Economics and Business, University of Groningen, Groningen, Netherlands
Hippolyte d’Albis
Affiliation:
Paris School of Economics, Paris, France
Eleni Iliopulos*
Affiliation:
Departement of Economics, EPEE, University of Evry, Univ. Paris-Saclay and Cepremap, Évry Cedex, France
*
Corresponding author: Eleni Iliopulos; Email: eleni.iliopulos@univ-evry.fr
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Abstract

In this work, we introduce rental markets in a general equilibrium model with borrowing constraints and infinitely lived agents. We estimate our model using standard Bayesian methods and match US data on recent decades. We highlight a crucial relationship that strongly links interest rates, house prices, and rents. It represents agents’ arbitrage when choosing their degree of participation in the housing market (i.e. their real estate holdings). This framework is particularly well suited for explaining how policy-induced changes in households’ preferences have driven house prices up while pushing rent-price ratios down in the aftermath of the Covid-19 outbreak. It also allows us to parsimoniously track the unequal impact of these changes on agents’ decisions and welfare, which crucially depends on whether they are owners or renters.

Keywords

Housingrental marketscollateral constraintsfinancial frictions
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 27
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

We are thankful to the editor and two referees for insightful comments. We thank Stephane Adjemian, Viola Angelini, Andrea Ferrero, Aurélien Eyquem, Alexia Fürnkranz-Prskawetz, François Langot, Jürgen Maurer, Xavier Ragot, Thepthida Sopraseuth, Fabien Tripier, Bertrand Wigniolle as well as all participants at the seminar at the University of Maine, the seminar at the University of Orleans, GATE seminar, the Paris-Saclay seminar, the Sheffield economics seminar, OFCE seminar, TEPP conference and T2M King’s college participants for interesting discussion. We thank the Retirement and Savings Institute for financial support. Bertrand Achou acknowledges financial support by the European Commission in the framework of the European Doctorate in Economics - Erasmus Mundus (EDE-EM). This paper previously circulated under the title “Real Estate and Rental Markets During COVID Times”. The usual disclaimer applies. Competing interests: The author(s) declare none.

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