Recovering the Bridge between User Cost Framework and No Arbitrage Conditions in Housing Market

This study examines the rent to price RP ratio as a fundamental valuation metric, leveraging millions of apartment sales and rental contract records from Seoul, South Korea 2015 to 2024. By identifying 51,201 pairs of precisely matched sale and newly signed rental contracts, occurring in the same apartment and month, we construct a refined RP ratio addressing measurement errors. Our analysis reveals that older properties and those with lower floor area ratios exhibit lower RP ratios, reflecting redevelopment expectations. Additionally, this matched sample, when constructed as an index to remove composition effects, significantly predicts future rent growth but not price appreciation. This pattern is consistent with informational efficiency where housing prices incorporate forward looking information while rents adjust more gradually. When measurement error is corrected, the market clearing condition implied by the user cost framework is right and demonstrates its consistency with informational efficiency in real estate markets. JEL Classification: G14, R31