The search and matching process in the housing market: The interaction between the rental and selling prices

Abstract

Purpose

This paper aims to study the relationship between the rental and selling prices, a very important topic that forms the fundamentals of real estate markets.

Design/methodology/approach

This theoretical paper makes use of a search and matching model of the housing market. The search and matching models are the benchmark models of the “matching” markets, such as the labour market and the housing market, where trade is a decentralised, uncoordinated and time-consuming economic activity.

Findings

Unlike the previous related literature, where this relation is usually analysed in the context of the present value equation, this paper shows the existence of a “dual” relation between rental and selling prices as follows: one in the homeownership market and another one in the rental market. This “dual” relation connects the rental and homeownership markets and allows to get equilibrium in both markets with positive house prices.

Research limitations/implications

Several topics could be deepened for making the paper richer and more interesting, although at the cost of much more mathematics. First of all, the introduction of specific functional forms for both the rent function and the sale price function, so as to calculate both the elasticity of rent with respect to sale price and the elasticity of sale price with respect to rent. In this way, it would be possible to understand how each market (rental and homeownership) reacts to shock and policies that affect the other market.

Practical implications

In general, this framework could help policymakers to design housing policy reforms that take into consideration the effects on both markets. Indeed, some policies could have positive effects on rental markets but perverse effects on homeownership markets and vice versa.

Originality/value

None of the existing and related works of research have considered how to take advantage of the search and matching approach to derive both a “rent function” and a “sale price function” that connect closely the rental and homeownership markets.

Citation

Lisi, G. (2019), "The search and matching process in the housing market: The interaction between the rental and selling prices", Journal of European Real Estate Research, Vol. 12 No. 3, pp. 392-404. https://doi.org/10.1108/JERER-05-2019-0016