Evaluation of House Price Models Using an ECM Approach: The Case of the Netherlands

OFRC Working Paper No. 2009-05

28 Pages Posted: 28 Oct 2010

See all articles by Marc Francke

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

Suncica Vujic

Vrije Universiteit Amsterdam, School of Business and Economics

G.A. Vos

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: July 1, 2009

Abstract

The research question of this paper is whether the Dutch housing market is overvalued or not. This is investigated by using different types of error correction models and by examining the impact of different variables that can explain house price changes in the Netherlands. The current financial crisis confirms the notion that developments in the residential property sector are important for the economy as a whole. For that reason it is important to fully understand the factors that affect the housing market. Therefore we need a long-run model approach that relates house prices to fundamentals. However the model should also be able to detect bubbles in the short run. As a first step, we look at the affordability of house prices and mortgage payments in order to check how well the housing market performs in the short run. In the medium to long-run, we estimate an error correction model relating prices to fundamentals, using variables like interest rate, labour income, financial assets of households, and household stock. The error correction model tests whether prices tend to revert to some equilibrium price level. We evaluate existing house price models for the Netherlands, which we use as a benchmark for comparison to our improved model. Finally, we try to forecast housing prices based on a few simple economic scenarios.

Keywords: Bubble, Cointegration, Error Correction Model, Long-run Equilibrium

JEL Classification: C22, C53, R3

Suggested Citation

Francke, Marc and Vujic, Suncica and Vos, Gerjan A., Evaluation of House Price Models Using an ECM Approach: The Case of the Netherlands (July 1, 2009). OFRC Working Paper No. 2009-05, Available at SSRN: https://ssrn.com/abstract=1698613 or http://dx.doi.org/10.2139/ssrn.1698613

Marc Francke (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

Ortec Finance ( email )

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Amsterdam, 1043 CP
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HOME PAGE: http://www.ortec-finance.com

Suncica Vujic

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31(0)551 3555 (Fax)

Gerjan A. Vos

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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