The price-rent dynamics and linkage of urban housing: evidence from Singapore

• DOI: https://doi.org/10.1108/IJHMA-02-2021-0023
• Published date: 07 August 2021
• Date: 07 August 2021
• Pages: 504-520
• Subject Matter: Property management & built environment,Real estate & property,Housing markets
• Author: Philip Inyeob Ji,Seema Bogati Bhandari

The price-rent dynamics and

linkage of urban housing:

evidence from Singapore

Philip Inyeob Ji

Department of Economics, Dongguk University, Seoul, Republic of Korea, and

Seema Bogati Bhandari

School of Business,Dongguk University, Seoul,Republic of Korea

Abstract

Purpose –The aim of this paper is to examine dynamic linkages between price and rent and between

property types. Intuition suggests that housing market segmentsexperience different market cycles in

response to macroeconomic shocks. However, they may be dynamically interlinked in urban areas

because of substitutability. The linkage may even change, if preference weakens for multiple

occupancies. A sudden reduction in apartment demand may create repercussions to othe r housing

segments. Past analyses, despite their contributions, are static and do not co nsider possible linkages

between property types. To fill this void, this paper investigates the price-rent dynam ics for urban

homes by adopting the case of Singapore.

Design/methodology/approach –This paper applies a methodology from Phillips et al. (2015) to

Singaporean housing(price and rent) data. Phillips et al. (2015) recently proposed a test for an explosive root

in time seriesdata and has spurred several empirical applicationsin the bubble literature.

Findings –This paper finds for Singapore that the markets were subjected to explosive growth (where

rents grew at a higher ratethan prices did) during the Global Financial Crisis. Also,the results suggest that

rent drives priceand that non-landed housing (offices in centralareas) leads to other residential housing (non-

residentialhousing) in both price and rent.

Practical implications –Overall, the present findings suggest that rent drives price, while property

types are interlinked. Non-landedhomes and offices in central areas are the sources of repercussions. Under

normal circumstances, rentalshocks may be propagated positively from nonlanded housing (central offices)

to the other residential (non-residential) property types as the presentfindings suggest, which enables us to

infer that a decrease in non-landed housing (central offices) rent may lead to an increase in rent on other

property types because pandemicshocks only shift demand fromone property type to another, unlike typical

macroeconomicshocks.

Originality/value –Urban homes are faced with uncertainty arising from the COVID-19 outbreak for

which city residents have a stronger incentive to exile to suburbs. Urban life may no longer be attractive

because of socialdistancing and work from home policy. This has implicationsfor urban home demands that

are closely linkedto urban house price and rent. In the present study, the paper set out to investigate the price-

rent and property-typedynamics for urban homes in Singapore.

Keywords Law, Housing markets, Housing prices, Housing market analysis, Macroeconomics,

Pricing model, Price-to-rent ratio, Explosive roots, Rational bubbles

Paper type Research paper

JEL classification –C22, G12, R30

This work was supported by a research grant from the Institute of Economic Research, Aoyama

Gakuin University. The corresponding author acknowledges that Dongguk University Seoul

provided a research leave for him to complete this work.

IJHMA

15,3

504

Received21 February 2021

Revised23 March 2021

Accepted30 March 2021

InternationalJournal of Housing

Marketsand Analysis

Vol.15 No. 3, 2022

pp. 504-520

© Emerald Publishing Limited

1753-8270

DOI 10.1108/IJHMA-02-2021-0023

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1753-8270.htm

1. Introduction

1.1 Motivation and literature review

This article examines dynamiclinkages between price and rent and between property types

for urban housing. Intuition suggests that urban housing market segments experience

different market cycles in response to macroeconomic shocks, while they may be

dynamically interlinked because of substitutability. The linkage may even change, as

preference evolves for multipleoccupancies. For example, a reduction in apartment demand

may create repercussionsto stand-alone houses.

Literature review indicates that evidencehas long been available of urban (or suburban)

house price determinants (See Table 1 for literature review summary). Although Algieri

(2013) argues that the determinants include population, construction costs, house supply,

rent, income, credit and macroeconomic variables, Droes and van de Minne (2016) contend

that the determinacy changes over time.For an emerging economy, China, Choi et al. (2019)

find that the influence of population structure on house price growth strengthens as

population growth increases. Cerito

glu (2020) document for Turkey that income is an

important driver of housing demand.Hill and Syed (2016) and McQuinn et al. (2021) add that

quality of housing should be consideredin a house price analysis because median price and

rent, the most common metrics in housing research, alone do not provide sufficient

information. Particularly,Hill and Syed’s (2016) approach of using a large sample of 730,000

observations is a usefulreference for house price research.

However, studies are relativelyscant on the price-rent dynamics of urban housing. Most

of the existing work put the price-rent ratio to bubble tests rather than examine its

dynamics. (See, for example, Mikhed and Zem

cík, 2009;Liu et al., 2017) Another gap in the

literature is the lack of cross-property-type dynamics, although it would be informative to

account for the property type in studying the price-rent dynamics because the urban

housing market is composed of several property type segments; for example, detached

house, semi-detached house, terrace, (most commonly) apartments and condominiums. For

tenants, apartments are more affordable and traded more frequently than detached houses,

while, for investors, the choiceof property types presents a portfoliodiversification problem

because diversificationacross all property types may be beneficial.

Table 1.

Summary of

literature

Topics Authors Findings

Determinants of

urban house price

Richardson et al. (1974) Determinants include housing characteristics, general spatial

variables, accessibility and environmental quality considerations

Algieri (2013) Determinants include population construction costs, house

supply, rent, income, credit and macroeconomic variables

Droes and Van de Minne

(2016)

Determinacy changes over time

Choi et al. (2019) Influence of population structure on house price growth

strengths as population growth increases

Ceritoglu (2020) Income is an important driver of housing demand that

determines housing demand for Turkey

Hill and Syed (2016) and

McQuinn et al. (2021)

Quality should be considered in housing price analysis

Price-rent ratios Clark and Lomax (2020) The PR ratio is explained by property characteristics,

neighborhood and location

Property type

diversification

Eichholtz (1995) Diversification across the region is more effective for the

retail property but ineffective for office and office/R&D

properties. Diversification is ineffective for retail properties

Linkage of

urban housing

505