What drives returns to euro area housing? Evidence from a dynamic dividend-discount model
We apply a dynamic dividend-discount model to analyse unexpected housing returns in a panel of eight euro area countries which together comprise 90% of euro area GDP. The application of this model allows for a de-composition of house price movements into movements in rent (cash-flow) and expected return news components. The empirical application of the model involves the estimation of a panel vector autoregressive model (VAR) for four variables –excess return to housing, rents, the real interest rate and real disposable per capita income– using quarterly data over the period 1985-2007. This empirical investigation yields two main findings. First, the bulk of the variability of house price move-ments in the panel of countries analysed can be attributed to movements in the rental yield. Indeed, perturbations to rents appear to result in a one-to-one analogous movement in house prices over the long term once controlling for changes in expected returns. Second, evidence from the dynamic profile of shocks along with the negative co-movement between changing rental yield expectations and changing expected returns on housing assets would suggest that euro area house prices overreact to news. JEL Classification: R21, C33, G12
|Date of creation:||Mar 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
- Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
- Campbell, Sean D. & Davis, Morris A. & Gallin, Joshua & Martin, Robert F., 2009. "What moves housing markets: A variance decomposition of the rent-price ratio," Journal of Urban Economics, Elsevier, vol. 66(2), pages 90-102, September.
- John Krainer & Chishen Wei, 2004. "House prices and fundamental value," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct1.
- John Y. Campbell, Robert J. Shiller, 1988.
"The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,"
Review of Financial Studies,
Society for Financial Studies, vol. 1(3), pages 195-228.
- Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
- John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
- Joshua Gallin, 2008. "The Long-Run Relationship Between House Prices and Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 635-658, December.
- Castrén, Olli & Fitzpatrick, Trevor & Sydow, Matthias, 2006. "What drives EU banks’ stock returns? Bank-level evidence using the dynamic dividend-discount model," Working Paper Series 0677, European Central Bank.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005.
"Assessing high house prices: bubbles, fundamentals, and misperceptions,"
218, Federal Reserve Bank of New York.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
- Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc.
- Alberto Plazzi & Walter Torous & Rossen Valkanov, 2010. "Expected Returns and Expected Growth in Rents of Commercial Real Estate," Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3469-3519.
- Castrén, Olli & Osbat, Chiara & Sydow, Matthias, 2006. "What drives investors’ behaviour in different FX market segments? A VAR-based return decomposition analysis," Working Paper Series 0706, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20091019. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)
If references are entirely missing, you can add them using this form.