SHOCKS AND VALUATION IN THE RENTAL HOUSING-MARKET

This paper develops and analyzes a complete structural model of the re ntal housing market to assess the impact of major shocks like tax refo rm on the asset value of rental housing. Proper assessment of the impa ct of shocks on asset value requires specification of such a structura l model of the rental market; included in the dynamic system of simult aneous equations is a demand equation, a supply equation, a constructi on equation, and an asset price equation. The basic model is solved an alytically, and comparative static results are obtained for the steady -state values and the adjustment paths of the endogenous variables (re nt, capital stock, construction, and asset price). The model is also a nalyzed numerically. Various modifications to the basic model are then introduced, in order to generate theoretical and numerical results th at are more consistent with recent housing market developments. The mo del makes several contributions. It represents an alternative to the s tandard approach used in much of the real estate literature, in which a discounted cash flow model with ad hoc assumptions about the speed a t which rents adjust to equilibrium is used to generate asset price es timates. It also serves as a guide to how much needed econometric anal ysis of the rental housing market might proceed. (C) 1994 Academic Pre ss, Inc.