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House price misalignments and economic growth in Europe

Author

Listed:
  • Juan Carlos Cuestas
  • Merike Kukk
  • Natalia Levenko

Abstract

In this paper we investigate house price misalignments and their effect on the real economy. We estimate the long-term relationship between house prices and the fundamentals that determine long-term house prices for a panel of European countries with dynamic OLS, using data from 2004–2018. We find that income has been the main driver of house prices based on fundamentals in all countries, while the supply of dwellings has calmed the rise in house prices in some countries. We calculate house price misalignments, which are deviations of house prices from the value based on fundamentals, and we employ them in the growth model. The results of the growth regression indicate that house price imbalances amplify business cycles in the short term, but in the long term house price overvaluations slow economic growth down. The findings imply that it is crucial to take measures to stabilise housing cycles

Suggested Citation

  • Juan Carlos Cuestas & Merike Kukk & Natalia Levenko, 2021. "House price misalignments and economic growth in Europe," Bank of Estonia Working Papers wp2021-1, Bank of Estonia, revised 08 Apr 2021.
    • Handle: RePEc:eea:boewps:wp2021-1
    DOI: 25045520/012021/0183
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    More about this item

    Keywords

    housing markets; fundamental house price; misalignments; imbalances; overvaluation; economic growth;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • G01 - Financial Economics - - General - - - Financial Crises

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