House Prices and Housing Investment in Sweden and the UK. Econometric analysis for the period 1970-1998
We estimate quarterly dynamic housing demand and investment supply models for Sweden and UK for the sample period 1970-1998 using an Error Correction Method (ECM). This method requires as a preliminary step that we test for the order of integration and cointegration. The ECM models seem appropriate as the dynamics of both short-run (changes) and (long- run levels) adjustment processes are modelled. To facilitate comparisons of results between Sweden and UK we model both countries identically with approximately almost the same exogenous variables. The results indicate that the volatility in house prices and housing investment can be sought in the fundamentals representing the demand and supply sides in accordance with theoretical conceptions and experience of how the housing market works. The long run income elasticities for Sweden and UK are constrained to be 1.0 and 1.0 respectively. The long runs semi- elasticity for interest rates are 2.1 and 0.9 for Sweden and UK. The speed of adjustment on the demand side is 0.12 and 0.23 and on the supply side is 0.06 and 0.48 for Sweden respectively UK. Granger causality tests indicate that income Granger causes prices for Sweden, while for UK there is also a feedback from house prices to income. Prices Granger cause financial wealth for Sweden, while for UK it's vice versa. House prices cause household debt for Sweden, while for UK there is a feedback from debt. Interest rates Granger cause house prices for UK and Sweden. In both countries Tobin’s q Granger cause housing investment. Generally the diagnostic tests indicate that the model specifications were satisfactory to the unknown data generating process. Keywords: House prices, Housing investment, Tobins' q, Error Correction, Cointegration, long run and elasticities, forecasting ability.
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