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Assessing the House Price Dynamics in Lima

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  • Diego Vílchez

    (Central Reserve Bank of Peru)

Abstract

This paper uses a two-step procedure to analyze the long-run dynamics between real house prices and their fundamentals in Lima, Peru. In this framework, first a hedonic price index is calculated, and then used for estimating a quarterly vector error correction model over the period 1998-2014. The price determinants considered in this application are: Real mortgage interest rate, real gross domestic product, and trading volume. The reduced form of the model is employed for generating alternative price forecasts. In addition, a structural decomposition of the system allows us to identify and give an economic interpretation to the permanent and transitory shocks.Finally, this analysis is also applied to different tranches of the price distribution to assess if the interrelationships in the system vary across them. Results imply that income and trading volume shocks contribute the most at explaining the dynamics in prices. Also, under reasonable assumptions for the modeled fundamentals, predictions suggest that real house prices would undergo an important deceleration during the following years. Some signs of differenced behavior throughout the price distribution in the housing market cannot be ruled out in this analysis

Suggested Citation

  • Diego Vílchez, 2015. "Assessing the House Price Dynamics in Lima," IHEID Working Papers 09-2015, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp09-2015
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    File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP09-2015.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    House prices; hedonic index; vector autoregression;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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