eThesis - Kauppakorkeakoulun sähköiset gradut

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PURPOSE OF THE STUDY

The purpose of this thesis is to investigate whether rental yields in the housing market exhibit cross sectional variation, and if such variation does exist, what is causing it. Our hypothesis is that net rental yield declines as asset prices increase, a violation of the no arbitrage condition and thus, of the efficient markets hypothesis. Though this phenomenon has previously been documented, it has not been analyzed from an investments perspective. Therefore, we attempt to open up discussion on the causes and implications of cross-sectional variation of rental yields.

DATA

The main data in this study comprises of the Oikotie housing advertisement database, a large Finnish online home brokerage. The dataset includes all the data that advertisers enter when advertising a dwelling for sale or for rent. The data set covers a time period that begins in January 2002 and ends in September 2009 and after a process of matching advertisements of dwelling for rent to for sale advertisements, includes altogether 31,864 dwellings or dwelling pairs with data on both asking rent and sales price as well as several other dwelling-specific characteristics. Additional data has been gathered from the Statistics Finland database, the Helsinki Urban Facts database and the Google Maps service.

RESULTS

The results indicate that cross-sectional variation of rental yield exists and that it is strongly negative relationship with asset value. Thus it seems dwelling prices and rents are not considered simultaneously with a set rental yield in mind, but rather through separate processes. The difference in yields is economically significant, as the mean yield of the highest and lowest decile differ by up to 4 %.

In our regression analyses of net rental yields, we find statistically significant coefficients for variables reflecting dwelling size, age, type, location and many other factors, while controlling for time and macro-level factors such as unemployment and average income in the area. Although most of these coefficients are intuitive when considering rents and prices separately, the fact that net rental yield varies so greatly within a single market means that opportunities for profitable investment strategies exist, and are accessible even by using rather simple rules of thumb.