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House Prices and Housing Investment in Sweden and the UK. Econometric analysis for the period 1970-1998

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  • Bharat Barot

    (National Institute of Economic Research, Sweden)

  • Zan Yang

    (Institute for Housing & Urban Research, Sweden)

Abstract

We estimate quarterly dynamic housing demand and investment supply models for Sweden and UK for the sample period 1970-1998 using an Error Correction Method (ECM). This method requires as a preliminary step that we test for the order of integration and cointegration. The ECM models seem appropriate as the dynamics of both short-run (changes) and (long- run levels) adjustment processes are modelled. To facilitate comparisons of results between Sweden and UK we model both countries identically with approximately almost the same exogenous variables. The results indicate that the volatility in house prices and housing investment can be sought in the fundamentals representing the demand and supply sides in accordance with theoretical conceptions and experience of how the housing market works. The long run income elasticities for Sweden and UK are constrained to be 1.0 and 1.0 respectively. The long runs semi- elasticity for interest rates are 2.1 and 0.9 for Sweden and UK. The speed of adjustment on the demand side is 0.12 and 0.23 and on the supply side is 0.06 and 0.48 for Sweden respectively UK. Granger causality tests indicate that income Granger causes prices for Sweden, while for UK there is also a feedback from house prices to income. Prices Granger cause financial wealth for Sweden, while for UK it's vice versa. House prices cause household debt for Sweden, while for UK there is a feedback from debt. Interest rates Granger cause house prices for UK and Sweden. In both countries Tobin’s q Granger cause housing investment. Generally the diagnostic tests indicate that the model specifications were satisfactory to the unknown data generating process. Keywords: House prices, Housing investment, Tobins' q, Error Correction, Cointegration, long run and elasticities, forecasting ability.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0409022.

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Date of creation: 23 Sep 2004
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Handle: RePEc:wpa:wuwpma:0409022

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Keywords: House prices; Housing investment; Tobins' q; Error Correction; Cointegration; long run and elasticities; forecasting ability.;

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References

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  1. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-34, May.
  2. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
  3. Barot, Bharat & Takala, Kari, 1998. "House Prices and Inflation: A Cointegration Analysis for Finland and Sweden," Research Discussion Papers 12/1998, Bank of Finland.
  4. repec:fth:bfsefi:12/98 is not listed on IDEAS
  5. Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-55, December.
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  9. Berg, Lennart & Bergstrom, Reinhold, 1995. " Housing and Financial Wealth, Financial Deregulation and Consumption--The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 421-39, September.
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  11. Alogoskoufis, George & Smith, Ron, 1991. " On Error Correction Models: Specification, Interpretation, Estimation," Journal of Economic Surveys, Wiley Blackwell, vol. 5(1), pages 97-128.
  12. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
  13. Clements, Michael P. & Hendry, David F., 1997. "An empirical study of seasonal unit roots in forecasting," International Journal of Forecasting, Elsevier, vol. 13(3), pages 341-355, September.
  14. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(352), pages 661-92, December.
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Cited by:
  1. Philip Arestis & Ana Rosa Gonzalez, 2013. "Modeling the Housing Market in OECD Countries," Economics Working Paper Archive wp_764, Levy Economics Institute.

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