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

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. In the Netherlands the current financial crisis did not start with problems in the residential property market, but the housing market has been affected by the global financial and economical crisis. Therefore we need a long term 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 affordability ratios, such as debt to income or price to income ratios, in order to check how well the housing market works in the short run. In the medium run (two to five years), we estimate an error correction model relating prices to fundamentals (interest rates, labour income, financial assets of households, household stock, etc.). The error correction model tests whether prices tend to revert to some equilibrium price level or the ratio of price to income. The supply of new homes in the Netherlands is strongly regulated. Therefore, from the supply side we investigate a model which takes into account how supply conditions affect both the equilibrium price and the time path of adjustment to equilibrium. Finally, we try to forecast housing prices based on a few simple economic scenarioís.