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House prices and inflation : a cointegration analysis for Finland and Sweden

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  • Barot, Bharat
  • Takala, Kari

Abstract

Given the emphasis on price stability in monetary policy, the concern caused by recent rapid increases in housing prices are understandable.It is suspected that such rises may provide early indication of mounting inflationary pressure.The purpose of this paper is to formulate and estimate an error-correction system model for housing prices and inflation for forecasting purposes.By using the estimated cointegrating vector, we also get an estimate of the equilibrium level for house prices that might be helpful in analysing the current situation in the housing market and the stance for monetary policy. Housing prices typically exhibit large cycles, and they are thus predictable to some extent.Volatility is caused by the fact that the supply of houses does not react perfectly to changes in housing demand.However, housing prices and inflation tend to have similar growth rates over the long run.In other words, houses provide a good inflation shelter, but in the long run, the real return to is equal to the explicit or implicit rental income derived from the owning of houses.The estimation results also show that the changes in the general price level are transmitted into house prices rather quickly, but inflation is surprisingly insensitive to housing prices.The equilibrium relationship between housing prices and consumer prices is also affected in the short run by variables such as interest rates, wages and the unemployment rate. Keywords: House prices, inflation, cointegration

Suggested Citation

  • Barot, Bharat & Takala, Kari, 1998. "House prices and inflation : a cointegration analysis for Finland and Sweden," Research Discussion Papers 12/1998, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1998_012
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    References listed on IDEAS

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    Cited by:

    1. W. Miles, 2008. "Boom–Bust Cycles and the Forecasting Performance of Linear and Non-Linear Models of House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 249-264, April.
    2. Bharat Barot & Zan Yang, 2004. "House Prices and Housing Investment in Sweden and the UK. Econometric analysis for the period 1970-1998," Macroeconomics 0409022, University Library of Munich, Germany.
    3. Barot, Bharat, 2002. "Growth and Business Cycles for the Swedish Economy 1963-1999," Working Papers 79, National Institute of Economic Research.
    4. Irene de Greef & Ralph de Haas, 2002. "Housing Prices, Bank Lending, and Monetary Policy," Macroeconomics 0209010, University Library of Munich, Germany.
    5. Kuismanen, Mika & Laakso, Seppo & Loikkanen, Heikki A., 1999. "Demographic Factors and the Demand for Housing in the Helsinki Metropolitan Area," Discussion Papers 191, VATT Institute for Economic Research.
    6. Rima Turk, 2015. "Housing Price and Household Debt Interactions in Sweden," IMF Working Papers 2015/276, International Monetary Fund.
    7. Bharat Barot, 2001. "An Econometric Demand–Supply Model For Swedish Private Housing," European Journal of Housing Policy, Taylor and Francis Journals, vol. 1(3), pages 417-444.
    8. Elias Oikarinen, 2010. "Foreign Ownership of Stocks and Long-run Interdependence Between National Housing and Stock Markets—Evidence from Finnish Data," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 486-509, November.
    9. Oikarinen, Elias, 2006. "Price Linkages between Stock, Bond and Housing Markets - Evidence from Finnish Data," Discussion Papers 1004, The Research Institute of the Finnish Economy.
    10. Barot, Bharat & Yang, Zan, 2002. "House Prices and Housing Investment in Sweden and the United Kingdom: Econometric Analysis for the Period 1970-1998," Working Papers 80, National Institute of Economic Research.

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