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Dennis R. Capozza, Paul J. Seguin
NBER Working Paper No. 5179*
Issued in July 1995
---- Abstract -----
This paper studies expectations of capital appreciation in the housing market. We show that expectations impounded in the rent/price ratio at the beginning of the decade successfully predict appreciation rates, but only if we first control for cross-sectional differences in the quality of rental versus owner-occupied housing. We also demonstrate that observed rent/price ratios contain a disequilibrium component that also has power to forecast subsequent appreciation rates. Finally, we provide evidence consistent with euphoria: participants in housing markets appear to overreact to income growth.
*Published: Regional Science & Urban Economics, vol. 26, no. 3-4, pp. 369-386, June 199 6
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