Publication Type

Journal Article

Version

publishedVersion

Publication Date

9-2018

Abstract

This study proposes a utility indifference-based model to investigate the pricing issue of house rents under housing market uncertainty. Our model not only allows for the crucial features in the housing market, such as market incompleteness and high idiosyncratic risk, but also the interaction of households’ house tenure choices with their financial asset holdings. Our model provides interesting insights into the hedging of house market risk and determination of housing rents. In addition to the parameters describing the expected changes and volatility on stock and house returns, we also show that individual precautionary savings motive, idiosyncratic risk premium, and the correlation between stock and housing have important implications for the determination of housing rents. We also test the model predictions empirically using the data from major Asian markets and the empirical results better support the model predictions.

Keywords

Tenure choice, Resale risk, Reservation rent, Utility maximization, Incomplete markets

Discipline

Finance | Real Estate

Publication

Journal of Housing Economics

Volume

41

First Page

200

Last Page

217

ISSN

1051-1377

Identifier

10.1016/j.jhe.2018.06.003

Publisher

Elsevier

External URL

http://www.scopus.com/inward/record.url?eid=2-s2.0-85049422913&partnerID=MN8TOARS

Additional URL

https://doi.org/10.1016/j.jhe.2018.06.003

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