The Dynamics of House Prices - International Evidence

120 Pages Posted: 25 Sep 2008

See all articles by Jens Kjaer Sorensen

Jens Kjaer Sorensen

University of Copenhagen - Department of Economics

Date Written: March 10, 2006

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.

Keywords: crisis, bubble, real estate, housing market, credit, financial, boom, mean reversion

JEL Classification: B2, B23, O1, O16, P3, P34, F3, F36

Suggested Citation

Sorensen, Jens Kjaer, The Dynamics of House Prices - International Evidence (March 10, 2006). Available at SSRN: https://ssrn.com/abstract=1273183 or http://dx.doi.org/10.2139/ssrn.1273183

Jens Kjaer Sorensen (Contact Author)

University of Copenhagen - Department of Economics

Studistraede 6
DK 1455 Copenhagen, DK-1455
Denmark

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