Housing vacancy and rental adjustment: Evidence from Hong Kong

The traditional rental adjustment equation is flawed in that the equilibriu m paths for the adjustment of rents and vacancy rates cannot hold simultane ously over time. This paper suggests a two-equation model of rental adjustm ents based on adaptive expectations rather than the single-equation model p resented in the traditional literature, and provides empirical tests. Annua l data from the housing market in Hong Kong during the 1980-96 period are c onsistent with the adjustment equation. The results also show that the rate of change of real rents is neutral with respect to inflation.