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ction costs and the risks involved in renting and owning. Furthermore, he concludes that we cannot expect the rent-price ratio to be a precise indicator of market valuation because as any other asset price movements, house prices are notoriously hard to predict.

Study of Ayuso and Restoy (2005) uses a general inter-temporal asset pricing model where housing services and consumption are non separable to measure overvaluation of housing in relation to rents in the United States, United Kingdom and Spain. According to their paper part of the increase in real house prices during the late nineties can be seen as a return to equilibrium following some undershooting after previous price peaks. However, the results obtained from their analysis show that the increase in house prices led the rent-price ratios above market equilibrium by mid-2003. Moreover, the ratios were above equilibrium by 30 per cent in the UK, by 20 per cent in Spain and by 10 per cent in the US. It is worth mentioning, however, that part of the overvaluation, especially in Spain and the UK, may be an attribute to the sluggishness of supply in the presence of large demand shocks in this market and the slow adjustment of observed rents to the conditions prevailing in the housing market.

Not all of the research on relationship between rents and house prices share the same approach. The papers mentioned so far in this section focus on the idea of similarities between house markets and financial markets and try to get an overall idea of house price movements and rents movements using analysis and techniques used in finance. However, a class of studies, referred as sharing a macroeconomic approach, follow Potebra (1984) and ground the house price on models of supply and demand for housing whence relating it to a set of macroeconomic variables (Topel and Rosen 1988, Mankiw and Weil 1989, Muelbauer and Murphy 1997). These studies combine an asset return condition with housing services supply rule to express the equilibrium in house market as a function of surrounding economic environment. As mentioned earlier in the section, rents tend to be an important fundamental in the formulation of house prices and house market equilibrium. A good definition for house market disequilibrium is when a growth in price is not supported by fundamentals given by Stiglitz (1990). Moreover, in our case, the period between 1990 and 2006 has been related to a period characterised with the existence of a house bubble. Gallin (2006) and Mikhed and Zemcik (2007) employ panel data for the US to analyse house prices. Furthermore, they use income and rent as the only fundamental factors. Their results find that house price dynamics in the nineties cannot be explained by either of the two variables. While discussing the US market it is worth mentioning some other studies which make conclusions about market overvaluation by the support of the relationship between house prices, rents and other fundamentals. Case and Schiller (2004) were in favour of the existence of a speculative bubble in many regions of the US housing market based on the results of a survey of consumers' attitude towards housing. Moreover, Mikhed and Zemcik (2009) use a variety of macroeconomic fundamentals such as real house rent, mortgage rate, personal income, building cost, stock market wealth, and population in order to try to explain the movements of house prices. Based on the evidence they provide using un