Discussion paper
DP19956 Housing Prices Propagation: A Theory of Spatial Interactions
A puzzle is that price-to-rent ratios in the housing market vary a lot in time and space, even after accounting for differences in local discount rates or rent growth differences. We propose a variant of asset pricing equations for housing markets that include a price gradient in space. It is analogous to the transport equation in physics and generates a new range of solutions consistent with the facts. The rationale for the price gradient in the asset pricing equation is the existence of spatial search frictions for housing. It is supported by the data analysis of a large urban area, Paris region.
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