Abstract:
Housing price-to-income and price-to-rent ratios are among the most widely
monitored indicators of housing market conditions. While these ratios tend to
fluctuate around a constant level or a mild trend over the long term, they also tend
to deviate from these benchmarks for protracted periods. Traditional unit root
tests often indicate the presence of a unit root. This article uses the framework of
fractional integration to test the persistence of price-to-income and price-to-rent
ratios in a sample of 16 OECD countries spanning four decades. The results
indicate that the ratios are highly persistent. The possibility that persistence
estimates may be affected by structural breaks in the series is also considered,
but evidence of such breaks is found only in a very limited number of cases.
Policy action may be required if high price-to-income and price-to-rent ratios
have adverse social and economic consequences. Policies should be guided by a
careful analysis of the factors behind high ratios.
