The Dynamics of House Prices in Israel and the Effect of the Investor’s Fear Gauge

42 Pages Posted: 10 Oct 2014 Last revised: 20 Apr 2017

See all articles by Dotan Weiner

Dotan Weiner

University of Cambridge - Department of Land Economy

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Date Written: October 8, 2014

Abstract

A number of countries have experienced remarkably high growth rates in house prices since the Global Financial Crisis. This paper investigates the macroeconomic drivers of house prices in Israel, the OECD country with the highest growth rate, and tests for divergence of observed prices from underlying fundamentals. Applying cointegration and error-correction models to a comprehensive dataset of macroeconomic and financial data from 1998 to 2013, we model both the long-run equilibrium relationship and the short-run dynamics. While the surge in house prices is partially explained by fundamentals such as population growth, low unemployment and interest rates along with supply constraints, our results suggest that over the last four years of the study period, prices have deviated from fundamental values by approximately 20 percent. We also show that stock market volatility is a key predictor of house prices in the short run, indicating a shift towards increased investment in the housing market when other asset classes, notably the stock market, are perceived as very risky.

Keywords: Housing market, Macroeconomic Drivers, Asset Pricing, Volatility, Cointegration, Error Correction Model

JEL Classification: C22, R21, R31

Suggested Citation

Weiner, Dotan and Fuerst, Franz, The Dynamics of House Prices in Israel and the Effect of the Investor’s Fear Gauge (October 8, 2014). Available at SSRN: https://ssrn.com/abstract=2507307 or http://dx.doi.org/10.2139/ssrn.2507307

Dotan Weiner

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Franz Fuerst (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

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