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CEP discussion paper
Why have house prices risen so much more than rents in superstar cities?
Christian A. L. Hilber and Andreas Mense
January 2021
Paper No' CEPDP1743:
Full Paper (pdf)

JEL Classification: G12; R11; R21; R31; R52

Tags: house prices; housing rents; price-to-rent ratio; price and rent dynamics; housing supply; land use regulation

In most countries – particularly in supply constrained superstar cities – house prices have risen much more strongly than rents over the last two decades. We provide an explanation that does not rely on falling interest rates, changing credit conditions, unrealistic expectations, rising inequality, or global investor demand. Our model distinguishes between short- and long-run supply constraints and assumes housing demand shocks exhibit serial correlation. Employing panel data for England, our instrumental variable-fixed effect estimates suggest that in Greater London labor demand shocks in conjunction with supply constraints explain two-thirds of the 153% increase in the price-to-rent ratio between 1997 and 2018.