An empirical analysis of the northwestern european housing market : a panel vector error correction model approach

Abstract

We examine the international relevance of the house price model by Jacobsen and Naug (2004). First, we evaluate if the model is relevant to describe the housing market in Norway when extending the sample. In contrast to previous studies (Anundsen & Jansen, 2011; Boug & Dyvi, 2008; Lebesby, 2010), we include the financial crisis in to account for the altered relationship between interest rates and house prices. The adjusted model shows a better fit and we find that the financial crisis had a negative effect on house prices. We apply the adjusted model to seven additional countries in the Northwestern European area and find evidence against the hypothesis of an international relevance for the model. The model does not capture short-run fluctuations and shows limited support for long-run dynamics. Hence, we conclude that the model is not able to explain dynamics in the housing market outside Norway. Next, we evaluate whether some of the variables explain dynamics in the overall Northwestern European housing market by changing the model specifications. We build a Panel Vector Error Correction Model and find that both lending rates and unemployment rate are determinants of house prices in the short-run, and that the trend in the lending rate, the unemployment rate, and the disposable income influence long-run house prices. Further, the size of several long-run variables is coherent with the size of the variables found by Jacobsen and Naug in the original paper from 2004, indicating that prices in the Norwegian market move proportionally with the estimated trend for the broader market, in the event of changes to the independent variables. In total, we provide evidence for the relevance of the variables in explaining dynamics in the Northwestern European housing market.