Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: We study the long-term effects of macroeconomic fundamentals on apartment prices in major urban areas in Sweden and Germany. The panel cointegration analysis was chosen as the primary approach due to the limited availability of data for a more extended period and frequency. The dataset consists of 2 countries – Germany and Sweden. The Swedish dataset includes three major cities and a period of 23 years, while the German dataset includes 7 “Big cities” for 29 years. Pooling the observations allows overcoming data restrictions in econometric analysis of long-term time series such as spatial heterogeneity, cross-sectional dependence and non-stationary, but cointegrated data. The results lie in line with previous studies and also allow comparison of single city estimations in an integrated equilibrium framework. The empirical results indicate that apartment prices react much stronger on changes in fundamentals in major Swedish cities than in German ones despite quite similar underlying fundamentals. Comparative analysis of regulations on the rental market, bank lending policies, and approaches to valuation for mortgage purposes in these two countries provide evidence that this overreaction arises due to institutional differences in form bank lending policies, mortgage valuation practices, and regulations on the rental market. Application of the more sustainable value concept such as mortgage lending value in mortgage valuations could make lending for housing less procyclical and stabilize house prices over the long run. Moreover, it will help to keep house prices away from overreaction on changes in macroeconomic fundamentals.

Keywords: Housing market; macro economy; price determinants; panel cointegration; dymanic OLS

JEL-codes: C33; C51; R15; R30

35 pages, March 20, 2020

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