Testing the Dividend Discount Model in Housing Markets: The Role of Risk

Posted: 10 Dec 2018

See all articles by Guoliang Feng

Guoliang Feng

George Washington University, Department of Economics, Students

Ge Bao

University of International Business and Economics (UIBE)

Date Written: November 16, 2018

Abstract

Tests of the dividend discount model (DDM) applied to housing have studied the trade-off between the capitalization rate (CAP rate) and subsequent house price appreciation. Even allowing for attenuation bias because of actual appreciation does not equal expected appreciation, evidence for the DDM is strong. This research has included an implicit assumption that risks associated with housing investment Statistics (BLS) Rent Index to construct the CAP rate although recent research by Ambrose et al. (2015) has questioned this date. The American Housing Survey is used to construct estimates of the CAP rate which is then combined with standard appreciation measures to estimate total return and its variance over time for larger Metropolitan Statistical Areas (MSA) in the U.S. using statistically constructed estimates of the CAP rate and adding variance in total return to conduct tests of the DDM produces far stronger results than those obtained in previous studies of a cross section of cities in the U.S. But, when the BLS Rent Index is used to measure CAP rates and risk, the results are not consistent with DDM.

Keywords: Risk adjustment; Capitalization rate; BLS rent index; Dividend discount model

JEL Classification: R3; G1

Suggested Citation

Feng, Guoliang and Bao, Ge, Testing the Dividend Discount Model in Housing Markets: The Role of Risk (November 16, 2018). Journal of Real Estate Finance and Economics, Vol. 57, No. 4, 2018, Available at SSRN: https://ssrn.com/abstract=3285912

Guoliang Feng (Contact Author)

George Washington University, Department of Economics, Students ( email )

Washington, DC 20052
United States

Ge Bao

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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