Working Papers,
National Institute of Economic Research

Abstract: We estimate quarterly dynamic housing demand and investment supply models for Sweden and the UK for the sample period 1970-1998, using an Error Correction Method (ECM). To facilitate comparisons of results between Sweden and the UK we model both countries identically with approximately almost the similar type of exogenous variables. The long run income elasticities for Sweden and the UK are constrained to be 1.0 respectively. The long runs semi-elasticity for interest rates are 2.1 and 0.9 for Sweden and the UK. The speed of adjustment on the demand side is 0.12 and 0.23 while on the supply side is 0.06 and 0.48 for Sweden respectively the UK. Granger causality tests indicate that income Granger causes house prices for Sweden, while for the UK there is also a feedback from house prices to income. House prices Granger cause financial wealth for Sweden, while for the UK it's vice versa. House prices cause household debt for Sweden, while for UK there is a feedback from debt. Interest rates Granger cause house prices for the UK and Sweden. In both countries Tobin’s q Granger cause housing investment. Generally the diagnostic tests indicate that the model specifications were satisfactory to the unknown data generating process.

Keywords: House prices; Housing investment; Tobins' q; Error Correction; Cointegration; long run and elasticities; Granger- causality; forecasting ability

39 pages, December 1, 2002

Note: This paper is published in RURDS, Journal of the Applied Regional Science Conference, Vol. 14, No 2, July 2002.

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