Demographic trends, the rent-to-price ratio, and housing market returns

Abstract

We characterize the relationship between the rent-to-price ratio, expected returns, and expected rent growth in a dynamic housing valuation model, where the middle-aged-to-young (MY) ratio determines the slowly evolving mean of the rent-to-price ratio. The link between demographic trends and the housing market dynamics is established by analyzing how individuals’ housing demand varies across age cohorts using household-level survey data. Empirical results show that deviations of the rent-to-price ratio from its slowly evolving mean, which is determined by the MY ratio, exhibit pronounced predictive power for returns but weak predictive power for rent growth. Further analysis reveals heterogeneous evidence across sample cities.