The Q theory model of housing : a macroeconomic analysis of the dynamics in the Norwegian housing market

Abstract

This thesis develops a q theory model of housing, where the value of Norwegian housing, q, is defined as the ratio of housing prices to the construction costs of new housing and housing is defined as the aggregate housing stock in Norway’s national accounts. This thesis analyzes the development in q during the period 1992-2011 and show that q is positively and significantly related to housing investment when assuming that shocks in the economy are both absent and present. In the assumption that shocks are present in the economy, developments in income, debt, population, initiation of new housing construction, interest rates and taxes where analyzed. Empirical estimates show that the developments in population and interest rates in particular may explain the variance in q. The positive relationship between the value of housing and the aggregate housing stock suggests that there may be a presence of bubbles in the Norwegian housing market and that the dynamics in the housing market may be influenced by non-fundamental variables such as animal spirits and irrational exuberance. This finding must however be interpreted with caution since it is difficult to measure bubbles before they have burst. In addition, the empirical estimates have not accounted for all the variables that may impact the dynamics of the housing market and it is discussed that land prices in particular may have contributed to the rising housing prices. Thus it can neither be proved nor disproved that a bubble may exist in the Norwegian housing market. Nevertheless, this does not alter the main result in this thesis, that the value of housing is significantly related to housing investment according to the q theory model of housing.