Housing vacancy and rental adjustment: Evidence from Hong Kong

The traditional rental adjustment equation is flawed in that the equilibrium paths for the adjustment of rents and vacancy rates cannot hold simultaneously over time. This paper suggests a two-equation model of rental adjustments based on adaptive expectations rather than the single-equation model presented in the traditional literature, and provides empirical tests. Annual data from the housing market in Hong Kong during the 1980-96 period are consistent with the adjustment equation. The results also show that the rate of change of real rents is neutral with respect to inflation.