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Misalignments in house prices and economic growth in Europe

Author

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  • Juan Carlos Cuestas

    (Department of Economics and Finance, Tallinn University of Technology, Estonia; IEI and Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Merike Kukk

    (Department of Economics and Finance, Tallinn University of Technology, Estonia)

  • Natalia Levenko

    (Department of Economics and Finance, Tallinn University of Technology, Estonia)

Abstract

In this paper we investigate house price misalignments and how they affect the real economy. We estimate the long-term relationship between house prices and the fundamentals that determine long-term house prices for a panel of European countries with dynamic OLS, using data from 2005-2018. We find that income has been the main driver of fundamental house prices in all countries, while the supply of dwellings has calmed the rise in house prices in some of them. We calculate house price misalignments, which are deviations of house prices from the fundamental value, and we employ them in the growth model. The results of the growth regression indicate that house price imbalances amplify business cycles in the short term, but in the long term house price overvaluations slow economic growth down. The findings imply that it is crucial to take measures to stabilise housing cycles.

Suggested Citation

  • Juan Carlos Cuestas & Merike Kukk & Natalia Levenko, 2021. "Misalignments in house prices and economic growth in Europe," Working Papers 2021/07, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2021/07
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    References listed on IDEAS

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    More about this item

    Keywords

    housing markets; fundamental house price; misalignments; imbalances; overvaluation; economic growth;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • G01 - Financial Economics - - General - - - Financial Crises

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