Why Did House Prices Go Up? A Very Long-Run Historical Decomposition

41 Pages Posted: 27 Dec 2022 Last revised: 27 Mar 2023

See all articles by Martijn Dröes

Martijn Dröes

University of Amsterdam

Alex Van de Minne

University of Connecticut - School of Business

Date Written: December 16, 2022

Abstract

Using several centuries of data on house prices from Amsterdam, the Netherlands, and seven key house price determinants, this paper shows that the historically recent increases in house prices over the past decades can be explained by 1) the increasing effect of interest rates and income on house prices and 2) population growth. These factors explain about 70 percent and 20 percent of the changes in house prices over the period 1970-2012, respectively. These results are in line with the development of mortgage markets in this period and the cycle of urbanization, decline, and subsequent revival of urban conglomerates. Further results show that an error correction model that does not allow for time-varying parameters overestimates shocks out of equilibrium, a key characteristic of a house price bubble, by on average 0.9 times a standard shock out of equilibrium.

Keywords: house prices, decomposition, cointegration

JEL Classification: R31, N9, C32

Suggested Citation

Dröes, Martijn and Van de Minne, Alex, Why Did House Prices Go Up? A Very Long-Run Historical Decomposition (December 16, 2022). University of Connecticut School of Business Research Paper No. 23-04, Available at SSRN: https://ssrn.com/abstract=4305156 or http://dx.doi.org/10.2139/ssrn.4305156

Martijn Dröes

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Alex Van de Minne (Contact Author)

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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