engleski

Determinants of house prices in transition economies

This paper studies the house price developments in six European countries: Croatia, Estonia, Poland, Ireland, Spain and United Kingdom. The main goal of the paper is to explore the driving factors behind house prices rise in transition countries, a subject that is at present time unexplored. However, due to the fact that house price increases in the last 15 years are not idiosyncratic to transition countries, the analysis is extended to three EU-15 countries that have also recorded house price hikes in the recent past. In such a way, the similarities and differences between two groups of countries regarding the driving forces of house prices can be established. In the first part of the empirical analysis vector autoregression will be applied, in order to detect which of the five variables (GDP, housing loans, interest rates, construction production and house price persistence) contributes the most to changes in real house prices. In the second part of the analysis, general– to– specific approach to multiple regression is used. This approach will allow us to include additional explanatory variables suggested by the literature (affordability index, employment and construction cost index) in order to explain house prices changes. Moreover, this approach will enable the estimation of the house price gaps and time variant regression coefficients. The results of both the methods suggest that the driving force behind house price inflation in both group of countries are very similar and encompass combined influence of house price persistence, affordability considerations, propulsive lending activity and decreasing interest rates. GDP is not as relevant as named variables in determining house prices. The estimates also show that Estonia exhibits the largest house price gap, while house prices in Croatia and particularly in Poland are still slightly below the levels warranted by the fundamentals. On the other hand, prices in three EU-15 countries seem to be in line with the fundamentals.

house prices; transition; VAR; general-to-specific

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