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A Model of Cross-Country House Prices (228.91 KB PDF)

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Author Info
McQuinn, Kieran (Central Bank and Financial Services Authority of Ireland)
O' Reilly, Gerard (Central Bank and Financial Services Authority of Ireland)

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Abstract

The widespread nature of the recent international house price boom suggests that the underlying forces behind this sustained price increase may be common across countries. Many OECD countries have, over the past decade, witnessed sustained increases in living standards while housing affordability has further improved in recent years with the low interest rate environment experienced by many of these countries. In this paper we propose a theoretical model of house price determination that is driven by changes in income and interest rates. In particular, the current level of income and interest rates determine how much an individual can borrow from financial institutions to purchase housing and ultimately this is a key driver of house prices. The model is applied to a panel of 16 OECD countries from 1980 to 2005 using both single country-by-country and panel econometric approaches. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow and we find plausible and statistically significant adjustment, across countries, to this long run equilibrium.

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Publisher Info
Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 5/RT/07.

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Length: 34 pages
Date of creation: Jul 2007
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Handle: RePEc:cbi:wpaper:5/rt/07

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Find related papers by JEL classification:
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  12. Sean D. Campbell & Morris A. Davis & Joshua Gallin & Robert F. Martin, 2006. "A trend and variance decomposition of the rent-price ratio in housing markets," Finance and Economics Discussion Series 2006-29, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  15. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I. [Downloadable!] (restricted)
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  17. Andrew Levin & Chien-Fu Lin, 1992. "Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties," University of California at San Diego, Economics Working Paper Series 92-23, Department of Economics, UC San Diego. [Downloadable!]
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