Dynamic equilibrium of the housing market

This paper, derived within a general equilibrium framework, demonstrates th at housing price can be explicitly expressed as a combination of an exponen tial and linear function of housing rental. This model provides an explanat ion as to why housing appreciation may not match inflation in the long-run steady state. We show that only under a very particular set of conditions, will housing prices grow at a rate greater than the inflation rate. Evidenc e from the Hong Kong housing market supports the predictions of theory. Our model indicates that the housing market will be in the long-run steady sta te when the rent-value ratio is equal to the net discount rate.