The Dynamics of House Prices - International Evidence

Sorensen, Jens Kjaer (2006): The Dynamics of House Prices - International Evidence.

Abstract

‘New’ long run data regarding Norway, the Netherlands, United Kingdom and USA has been collected and will be graphically, statistically and econometrically compiled and analyzed to prove that real house prices in the long run are constant and mean reverting. Co-integration of nominal house prices show that the long run fundamentals of real estate are income, rent and construction costs consistently across markets. In contrast an ECM analysis underscores that house prices in the short run are momentum drive, and house prices can deviate substantially from equilibrium in the SR. This fact is supported by theoretical insight about behaviourism and herding behaviour.

Analyzing the empirical evidence of dynamics of house prices and relating it to history shows that the housing markets have become synchronized for the first time in history. The latest boom in house prices have been strong and could have created an international housing bubble. The main reason for the creation of bubbles has been identified as liberalization of credit. Turning points are highly correlated with credit constraints being imposed, but other shocks can initiate the process too: interest rate increases or public regulation. All it takes is a change in sentiment, which will make the short run house prices correct towards equilibrium.

• Item Type: MPRA Paper
• Language: English
• Keywords: house price; real estate; bubble; mean reversion; recession; synchronized; financial crisis; credit crisis
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B23 - Econometrics ; Quantitative and Mathematical Studies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Jakob Brochner Madsen; A Tobin’s q Model of House Prices Jakob Brochner Madsen; A Repayment Model of House Prices