Abstract
PurposeThis paper aims to assess the long-run drivers and short-term dynamics of real house prices in Sweden for 1986Q1 to 2016Q4. More specifically, the author examines the extent to which real house prices are determined by affordability, demographics and asset price factors.Design/methodology/approachThe author conducts a cointegration analysis and applies a vector autoregression model to examine the long- and short-run responsiveness of Swedish real house prices to a number of key categories of fundamental variables.FindingsThe empirical results indicate that house prices will increase in the long run by 1.04 per cent in response to a 1 per cent increase in household real disposable income, whereas real after-tax mortgage interest and real effective exchange rates show average long-term effects of approximately – 8 and – 0.7 per cent, respectively. In addition, the results show that the growth of real house prices is affected by growth in mortgage credit, real after-tax mortgage interest rates and disposable incomes in the short run, whereas the real effective exchange rate is the most significant determinant of Swedish real house appreciation.Originality/valueThe impact of the two lending restrictions been implemented after the financial crisis – the mortgage cap in October 2010 and the amortization requirement in June 2016 – are ineffective to stabilize the housing market. This suggests that macroprudential measures designed to ease pressure on housing prices and reduce risks to financial stability need to focus on these fundamentals and address the issues of tax deductibility on mortgage rates and the gradual implementation of debt-to-income limits to contain mortgage demand and improve households’ resilience to shocks.
Highlights
Swedish real house prices (RHPs) have tripled since the mid-1980s, and despite dips occurring in the early 1990s and during the global financial crisis, they are expected to surge to unprecedented new levels
The results show that real disposable income, one of the main determinants of housing affordability, is a key variable explaining RHP appreciation in the long run
As an interesting feature of the results, and consistent with the findings presented in the previous section, shocks to the real effective exchange rate (REER), mortgage credit and after-tax real interest rate together account for average of 48 per cent of the variation in real housing prices in both orderings
Summary
Swedish real house prices (RHPs) have tripled since the mid-1980s, and despite dips occurring in the early 1990s and during the global financial crisis, they are expected to surge to unprecedented new levels. Bergman et al (2015) studied house price trends in Denmark and Sweden using a bootstrap VAR to estimate the fundamental house price, which is shaped by changes in several macroeconomic variables such as interest rates, disposable income, housing supply and property taxes. Based on the literature reviewed above, and for the purposes of this study, I use three categories of explanatory fundamentals that presumably explain Swedish RHPs. The first category consists of affordability measures causing a demand shift for housing and includes real disposable income, real ATMRs, mortgage credit levels, equity prices and demographic factors such as population and employment. 4.2 Supply of housing and production costs One can study how well housing construction has developed in relation to the significant increase in demand factors over the past 30 years by determining the number of completed homes. Statistical tests are applied to determine the appropriate lag length p, and the long-run relation between real housing prices and their determinants is dictated on the basis of the estimated cointegration vector
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