Macro and Micro Drivers of House Price Dynamics: An Application to Dutch Data

Abstract

What is the role of micro and macro factors in determining house prices? We address this question by analyzing data on housing and mortgages from a survey of about 2,000 Dutch households over the period 1993–2009. We focus on the determinants of house owners’ subjective assessment of the value of their house, and highlight five main findings. First, house-specific factors, such as location and year of construction, play an important role in house price dynamics. Financing conditions – i.e. the presence of a mortgage, the mortgage type and the mortgage rate paid by households – are also important. Second, household-specific factors which the literature has found to explain the bias of self-reported house values (household income and wealth) have a significant effect on house prices. Third, macroeconomic variables such as long-term interest rates influence to an important extent how households value their home. Fourth, the dynamics of subjective house prices are “well behaved”, both in terms of persistence and mean reversion, indicating that house prices tend to converge to their long run equilibrium value. Finally, we find significant heterogeneity and segmentation of subjective house prices, especially along the dimensions of location, degree of urbanization, funding conditions and households’ income expectations. Overall, our results support the importance of including microeconomic factors in the analysis house price dynamics.