House prices and rents: An equilibrium asset pricing approach

We use a relatively general intertemporal asset pricing model where housing services and consumption are non-separable to measure overvaluation of housing in relation to rents in Spain, the UK and the US. Part of the increase in real house prices during the late nineties can be seen as a return to equilibrium following some undershooting after previous price peaks. However, marked increases in house prices led to price-to-rent ratios above equilibrium by mid-2003 (around 30% above equilibrium in the UK, 20% in Spain and 10% in the US). Part of that overvaluation — particularly in Spain and the UK — may be attributable to the sluggishness of supply in the presence of large demand shocks in this market and/or the slow adjustment of observed rents.