Impact of liquidity in sale/purchase market on rental markets in real estate domain

Abstract

World over there have been many studies that explain the rationale behind own a house versus renting one. Also, the behavior of rental yields and factors affecting have been studied to a reasonable extent. However, in the Indian context, the behavior of rental yields and its prediction has largely been elusive. At the outset, we set out to understand the impact of change in liquidity in the buy-sale market on rental yields in India. This proposal was backed by the belief that the activity in primary buy-sale market will affect the demand-supply dynamics in the secondary rental market, since every house put for sale tends to vanish from the secondary rental market till the transaction is closed. In addition, we believe that increased liquidity in buy-sale market can imply more of tenants being capable of buying their own homes and moving out of rental market lowering the demand. However, to understand the impact of liquidity in buy-sale market on rental yields, we needed to clearly understand the factors determining the rental yield. And thus began our arduous journey of building hypotheses, hunting for right data sources and then testing those hypotheses only get dejected most of the times. Through this paper we share our hypotheses and our attempts at testing those hypotheses.