Abstract
This paper studies the determinants of house prices in eight transition economies of central and eastern Europe (CEE) and 19 OECD countries. The main question addressed is whether the conventional fundamental determinants of house prices, such as GDP per capita, real interest rates, housing credit and demographic factors, have driven the observed house prices in CEE. We show that house prices in CEE can be explained well by the underlying conventional fundamentals and some transition specific factors, in particular institutional development of housing markets and housing finance and quality effects.
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Notes
The views expressed in this paper are those of the authors and do not necessarily represent the views of the BIS, the Oesterreichische Nationalbank or the ESCB.
Housing finance was generally unknown in socialist countries. Most urban housing was provided free of charge by employers or local authorities. For detailed descriptions of housing market institutions and housing finance in CEE, see OECD (2005) and Palacin and Shelburne (2005).
Private individuals in CEE own on average 80%–95% of the housing stock, and the ratio of owner-occupied housing in many countries exceeds 90% (OECD, 2005). In western Europe, the share of housing owned by private individuals ranges from about 60% in Austria and Sweden to 90%–95% in Belgium, Greece, Spain and Portugal; while the share of owner-occupied housing ranges from 38% in Germany to 80% in Ireland.
CEE countries that are members of the OECD are included only in the transition economies sample.
The large OECD sample comprises France, Germany, Japan, the United Kingdom and the United States. The small OECD sample comprises Austria, Belgium, Finland, Greece, Ireland, the Netherlands, Portugal and Spain from the euro area; plus Denmark, Norway, Sweden, Australia, Canada and New Zealand. The catching-up sample includes Greece, Ireland, Portugal and Spain.
Regression estimates with EBRD indicators and real wages exclude GDP per capita because of multicollinearity problems.
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Acknowledgements
We are thankful for helpful comments on earlier drafts by Peter Backé, Václav Beran, Luci Ellis, Jan Frait, Miroslav Singer, Greg Sutton, Paul Wachtel, two anonymous referees and participants of seminars at the BIS and the ECB. We would also like to thank Ljubinko Jankov, Gergõ Kiss, Luboš Komárek, Davor Kunovac, Miha Leber, Mindaugas Leika, Andreja Pufnik and Marjorie Santos for the help in collecting the data for CEE countries.
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Appendix
Appendix
Data description
GDP per capita in purchasing power standards, at current euro exchange rates (source: European Commission's AMECO database).
Interest rates for OECD countries are nominal lending rates for the whole economy (source: IMF International Financial Statistics). For CEE, a weighted average of lending rates on domestic and foreign currency loans was also used. Where complete series were not available, interest rates on foreign currency loans were proxied by the 3-month money market rate for the euro area (source: Eurostat's NewCronos). The weights were the respective shares of domestic and foreign currency loans in total housing loans.
CPI and inflation rates (to calculate real house prices and real interest rates) come from the WIIW's monthly database for CEE (except Estonia and Lithuania), and from International Financial Statistics.
Housing loans in OECD countries are proxied by total private loans as a share of GDP (source: International Financial Statistics). For Lithuania and Slovenia we use loans to households (source: central banks). For other transition economies, data on housing loans are available from central bank websites (for Croatia and Hungary, they were back casted using loans to households).
Equity price indices: Datastream; CEE nominal exchange rates against the euro: WIIW.
Unemployment rates: International Financial Statistics. Labour force: AMECO (annual data interpolated linearly to quarterly frequencies).
Real wages: nominal wages for the whole economy (or manufacturing) deflated by the CPI. (Sources: BIS, International Financial Statistics, WIIW).
Indices of institution reform of banks and non-bank financial institution: EBRD (interpolated linearly from annual to quarterly frequency).
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Égert, B., Mihaljek, D. Determinants of House Prices in Central and Eastern Europe. Comp Econ Stud 49, 367–388 (2007). https://doi.org/10.1057/palgrave.ces.8100221
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DOI: https://doi.org/10.1057/palgrave.ces.8100221