Club convergence in European housing prices: The role of macroeconomic and housing market fundamentals

Abstract

This study aims to determine whether there is convergence in house prices across a sample of European economies, including members and non-members of the Eurozone. Overall the literature has found no evidence of convergence of house prices across Europe. Using data from twelve countries over the time period 2004Q2 to 2016Q3 we test for the null hypothesis of convergence against an alternative of divergence (or club convergence) and apply a Bayesian dynamic panel model to determine house price dynamics and drivers. The results suggest the presence of five housing market clubs across Europe but there is no evidence of a Eurozone club. In addition we find that the main determinants of real house prices are mainly fiscal factors and unemployment. Given the significance of housing markets to the economy and stability of the financial system, the Eurozone may wish to consider measures that facilitate convergence across members’ housing markets.