Work

The Rise and Fall of the Price-to-Rent Ratio: Why Are Superstar Cities Different?

Year: 2025

Type: article

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.

Source: The Economic Journal

DOI: 10.1093/ej/ueaf124

Authors: Christian A L Hilber, Andreas Mense

Institutions: University of Zurich, London School of Economics and Political Science, Institut für Arbeitsmarkt und Berufsforschung

Language: English

Topic: Housing Market and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Sustainable cities and communities

Open Access status: hybrid

Estimated APC paid: $4,463