House prices and rents: a reappraisal

Bertrand Achou, Hippolyte d’Albis and Eleni Iliopulos
Working paper #6
Retirement and Savings Institute – September 2021

In this work we introduce rental markets in a “general equilibrium” model with borrowing constraints and infinitely lived agents. We estimate our model using standard Bayesian methods and match US data on recent decades. We highlight a crucial relationship that strongly links interest rates, house prices, and rents. It represents agents’ arbitrage when choosing their degree of participation in the housing market (i.e., their real estate holdings). This framework is particularly well suited for explaining recent trends in housing markets. It also allows us to parsimoniously track the unequal impact of shocks on agents’ decisions and welfare, depending on their housing status.