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Icelandic boom and bust - Immigration and the housing market

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  • Lúðvík Elíasson

Abstract

Possible explanations for the rapid increase in house prices and housing investment in Iceland between 2004 and 2007 and the subsequent market crash are studied. The boom was driven in part by banking liberalisation, international financial conditions, and domestic policies. A simple demand and supply model, based on the study by Elíasson and Pétursson (2009), is fitted to data through the recent boom-bust period. The model is remarkably robust through the cycle despite its unprecedented amplitude. However, it does not capture fully the turbulence in housing market data for the period since 2003. Different methods to account for the rapid rise in house prices and housing investment dynamics are compared. The price equation (demand) is improved by including net immigration as an explanatory variable showing that demographic factors, in addition to mortgage market restructuring, help in explaining the apparent bubble in the housing market. The sharp fall in housing investment in 2009 cannot, however, be modelled without the introduction of a dummy variable, accounting for the sudden-stop in financing at the beginning of the financial crisis in Iceland in late 2008.

Suggested Citation

  • Lúðvík Elíasson, 2014. "Icelandic boom and bust - Immigration and the housing market," Economics wp66, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp66
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    2. Ms. Anna Scherbina, 2013. "Asset Price Bubbles: A Selective Survey," IMF Working Papers 2013/045, International Monetary Fund.
    3. Jeremy J. Siegel, 2003. "What Is an Asset Price Bubble? An Operational Definition," European Financial Management, European Financial Management Association, vol. 9(1), pages 11-24, March.
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    5. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March.
    6. Mr. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing: The Changing Role of Financial Structure," IMF Working Papers 2005/200, International Monetary Fund.
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    Cited by:

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    2. Kurmaş Akdoğan, 2019. "Size and sign asymmetries in house price adjustments," Applied Economics, Taylor & Francis Journals, vol. 51(48), pages 5268-5281, October.

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