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Price Rigidity and Vacancy Rates: The Framing Effect on Rental Housing Markets

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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.

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Notes

  1. For more information, please visit http://www.bis.org/statistics/cp.htm/.

  2. For more information, please visit https://www.census.gov/housing/hvs/data/histtabs.html/.

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Acknowledgments

I am immensely grateful to Professor James B. Kau (Editor-in-Chief) and the anonymous referee for the constructive comments of this paper. Funding from the Ministry of Science and Technology of Taiwan under Project No. MOST-107-2410-H-390-016-MY3 has enabled the continuation of this research and the dissemination of these results.

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  1. Department of Finance, National University of Kaohsiung, No. 700, Kaohsiung University Rd., Nanzih District, 811, Kaohsiung, Taiwan, Republic of China

    I-Chun Tsai

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Correspondence to I-Chun Tsai.

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Tsai, IC. Price Rigidity and Vacancy Rates: The Framing Effect on Rental Housing Markets. J Real Estate Finan Econ 63, 547–564 (2021). https://doi.org/10.1007/s11146-020-09791-4

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