House Prices and Rents. The Italian Experience

The sale and lease real estate markets have cyclical developments which are often dissimilar in the short term and then take coincident trends in longer horizons. The imbalance in the relationship between prices and income is normally used by economists to determine any "housing bubbles". However, the structural limitations require caution in the use of the ratio between prices and rents as an indicator of an over - or under - evaluation in the real estate market. The present work has investigated the relationships between selling and rental prices in the Italian housing market, trying to define the actual cause-effect relationships in quantitative terms too. It was used a multivariate autoregressive (VAR) model to interpret the mutual influences between the two sectors and the macroeconomic fundamentals . The results show that housing prices can influence rents, but not the opposite. The Italian housing demand, even the one for investment , does not consider rent as a proxy for the corresponding dividend.