Economic relationships between selling and rental prices in the Italian housing market

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

In this paper the relationship between price and rent dynamics in the Italian housing market is studied. The aim is reached through the implementation of a multivariate autoregressive model (VAR), that makes it possible to explain the interdependencies of multiple time series. The analysis considers a series of macroeconomic variables in the model that in the deductive interpretation of the phenomenon and on the basis of other experiences in current literature, were evaluated as potential keys to understanding the relationship between prices and rents. The variables selected, along with residential real estate prices and real residential rents, were: the real short term interest rate, the time series of the annual differences between the actual and the expected Gross Domestic Product, real investments in housing. The data series cover the period from 1980 to 2008. The results obtained show some peculiarities of the Italian real estate market.