Price Rigidity and Vacancy Rates: The Framing Effect on Rental Housing Markets
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Price Rigidity and Vacancy Rates: The Framing Effect on Rental Housing Markets I-Chun Tsai 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper proposes a new explanation for housing rent price rigidity. When high inflation or low inflation occurs, the bargaining process for new rent price represents negotiations representing increasing or diminishing utility for landlords. Based on framing effect theory, this study hypothesized that utility increasing-bargaining causes landlords to choose to give greater concessions and prefer short-term contracts. Although the income obtained from single contracts is comparatively lower, the high transaction volume (number of lease contracts) causes a reduction in the number of vacant properties and a higher frequency of price adjustments. Conversely, when low inflation occurs, landlords face utility decreasing-bargaining, reduce their concessions, and exhibit a preference for long-term contracts, thereby leading to an increase in the number of vacant houses and a lower frequency of price adjustments. Using US rental market data, this study explains asymmetric rent volatility and changes in the vacancy rate, and provides related evidence supporting the hypothesis that this rental market phenomenon is caused by an inflation illusion. Keywords Housing rent price rigidity . Rent volatility . Vacancy rate . Framing effect .
Inflation illusion
Introduction Goodhart (2001) indicated that rent is a crucial variable that connects asset prices to the price of goods and services. If this variable cannot be efficiently adjusted, the asset and goods and services markets are adversely affected, resulting in the misallocation of resources. Shimizu et al. (2010) raised a question regarding rent rigidity. Japan’s consumer price index for rent has remained largely stable, even during the period of
* I-Chun Tsai [email protected]
1
Department of Finance, National University of Kaohsiung, No. 700, Kaohsiung University Rd., Nanzih District, 811 Kaohsiung, Taiwan, Republic of China
I. Tsai
high housing market volatility in the 1980s. After examining individual data points, Shimizu et al. (2010) discovered that 90% of the samples had no changes in rents per year and that the likelihood of rent adjustment was related to the deviation between the actual rent and target level. The Japanese rental market has a high degree of rent rigidity; since the collapse of the housing market in 1990, housing prices have fallen sharply, while rents have not declined, demonstrating the downward rigidity of rent relative to housing price. In reality, this rigidity has not only occurred in Japan. Genesove (2003) reported that the percentage of nominal rental prices that were unadjusted from year to year in the United States was approximately 29%, whereas Hoffmann and Kurz-Kim (2006) found that percentage in Germany was approximately 78%. Cheung et al. (1995) examined the causal relationships between sale price changes and rental rate changes in the Hong Kong real estate mark
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