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Permanent and transitory shocks in owner-occupied housing: A common trend model of price dynamics

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  • Yang, Zan
  • Wang, S.T.
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    Abstract

    Significant fluctuations in house prices have received considerable attention in recent years. An understanding of the forces underlying the departure from fundamental values is important in explaining the mechanisms underlying housing market performance and predicting potential house price changes in the future. This study constitutes the first use of a common trend (CT) model to analyze private house prices in the Swedish market. We employ a cointegration system to analyze the macro variables of consumption expenditure per capita, user costs and house prices. We decompose shocks into those resulting from fundamental variables, specified in this research as income and the interest rate, and those resulting from cyclical variables. The results indicate that interest rates play a dominant role in explaining house price swings, and are also significant in determining user costs for households in Sweden. Transitory shocks are found to have little explanatory power for house prices and user costs in the long run. A number of tests have been performed to verify the robustness of the specification and results.

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    Article provided by Elsevier in its journal Journal of Housing Economics.

    Volume (Year): 21 (2012)
    Issue (Month): 4 ()
    Pages: 336-346

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    Handle: RePEc:eee:jhouse:v:21:y:2012:i:4:p:336-346
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622881

    Keywords: Common trend model; Private house prices; Permanent shocks; Transitory shocks;

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