What Causes the Positive Price-Turnover Correlation in European Housing Markets?

Posted: 20 Nov 2018

See all articles by Martijn Dröes

Martijn Dröes

University of Amsterdam

Marc Francke

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

Date Written: November 13, 2018

Abstract

This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector autoregressive model, we find that there is a particularly strong feedback mechanism between prices and turnover. Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price-turnover correlation. The results in this paper imply that, to understand price and turnover dynamics, it is important to model prices and turnover as two interdependent processes. There is a considerable bias in the coefficient estimates of standard house price models if this dependency is not explicitly taken into account.

Keywords: price-turnover relationship; feedback; momentum effects; credit constraints; nominal loss aversion

JEL Classification: E02; R31; 018

Suggested Citation

Dröes, Martijn and Francke, Marc, What Causes the Positive Price-Turnover Correlation in European Housing Markets? (November 13, 2018). Journal of Real Estate Finance and Economics, Vol. 57, No. 4, 2018, Available at SSRN: https://ssrn.com/abstract=3284041

Martijn Dröes (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Marc Francke

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

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