Long run apartment price dynamics in Swedish and German cities

Sviatlana Engerstam

doi:10.1108/jerer-03-2020-0020

Abstract

PurposeThis study examines the long term effects of macroeconomic fundamentals on apartment price dynamics in major metropolitan areas in Sweden and Germany.Design/methodology/approachThe main approach is panel cointegration analysis that allows to overcome certain data restrictions such as spatial heterogeneity, cross-sectional dependence, and non-stationary, but cointegrated data. The Swedish dataset includes three cities over a period of 23 years, while the German dataset includes seven cities for 29 years. Analysis of apartment price dynamics include population, disposable income, mortgage interest rate, and apartment stock as underlying macroeconomic variables in the model.FindingsThe empirical results indicate that apartment prices react more strongly on changes in fundamental factors in major Swedish cities than in German ones despite quite similar development of these macroeconomic variables in the long run in both countries. On one hand, overreactions in apartment price dynamics might be considered as the evidence of the price bubble building in Sweden. On the other hand, these two countries differ in institutional arrangements of the housing markets, and these differences might contribute to the size of apartment price elasticities from changes in fundamentals. These arrangements include various banking sector policies, such as mortgage financing and valuation approaches, as well as different government regulations of the housing market as, for example, rent control.Originality/valueIn distinction to the previous studies carried out on Swedish and German data for single-family houses, this study focuses on the apartment segment of the market and examines apartment price elasticities from a long term perspective. In addition, the results from this study highlight the differences between the two countries at the city level in an integrated long run equilibrium framework.

Highlights

House prices have been rising in many countries since the 1990s (Figure A1 in Appendix 1)
Conclusions and policy implications This study examines the impact of macroeconomic fundamentals on apartment prices in Germany and Sweden in the long run
The estimations presented in this paper lead to one important conclusion that is different from the studies done before: apartment price dynamics in Swedish cities differs, to a great extent, from those in German cities despite quite similar underlying development of fundamentals

Summary

Introduction

House prices have been rising in many countries since the 1990s (Figure A1 in Appendix 1). Can changes in fundamental factors explain the difference in long run apartment price dynamics in Germany and Sweden?

Results

Conclusion