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Forecasting housing investment

Author

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  • Martínez, Carlos Cañizares
  • de Bondt, Gabe
  • Gieseck, Arne

Abstract

This study applies a model averaging approach to conditionally forecast housing investment in the largest euro area countries and the euro area. To account for substantial modelling uncertainty, it estimates many vector error correction models (VECMs) using a wide set of short and long-run determinants and selects the most promising specifications based on in-sample and out-of-sample criteria. Our results highlight marked cross-country heterogeneity in the key drivers of housing investment which calls for country-specific housing market policies. A pseudo out-of-sample forecast exercise shows that our model averaging approach beats a battery of ambitious benchmark models, including BVARs, FAVARs, LASSO and Ridge regressions. This suggests that there is ample scope for model averaging tools in forecast exercises, notably as they also help to reduce model uncertainty and can be used to assess forecast uncertainty. JEL Classification: C32, C51, C52, C53, E22

Suggested Citation

  • Martínez, Carlos Cañizares & de Bondt, Gabe & Gieseck, Arne, 2023. "Forecasting housing investment," Working Paper Series 2807, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232807
    Note: 337418
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    More about this item

    Keywords

    Housing investment; model and forecast averaging; Tobin’s Q; VECM;
    All these keywords.

    JEL classification:

    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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