What drives returns to euro area housing? Evidence from a dynamic dividend-discount model
AbstractWe apply a dynamic dividend-discount model to analyse unexpected housing returns in a panel of eight euro area countries which together comprise 90% of euro area GDP. The application of this model allows for a de-composition of house price movements into movements in rent (cash-flow) and expected return news components. The empirical application of the model involves the estimation of a panel vector autoregressive model (VAR) for four variables –excess return to housing, rents, the real interest rate and real disposable per capita income– using quarterly data over the period 1985-2007. This empirical investigation yields two main findings. First, the bulk of the variability of house price move-ments in the panel of countries analysed can be attributed to movements in the rental yield. Indeed, perturbations to rents appear to result in a one-to-one analogous movement in house prices over the long term once controlling for changes in expected returns. Second, evidence from the dynamic profile of shocks along with the negative co-movement between changing rental yield expectations and changing expected returns on housing assets would suggest that euro area house prices overreact to news. JEL Classification: R21, C33, G12
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1019.
Date of creation: Mar 2009
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Find related papers by JEL classification:
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-08 (All new papers)
- NEP-EEC-2009-08-08 (European Economics)
- NEP-URE-2009-08-08 (Urban & Real Estate Economics)
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