Scandinavian Working Papers in Economics

Working Papers,
National Institute of Economic Research

No 138: Macroeconomic Effects of a Decline in Housing Prices in Sweden

Peter Gustafsson (), Pär Stockhammar () and Pär Österholm ()
Additional contact information
Peter Gustafsson: National Institute of Economic Research, Postal: National Institute of Economic Research, P.O. Box 3116, SE-103 62 Stockholm, Sweden
Pär Stockhammar: National Institute of Economic Research, Postal: National Institute of Economic Research, P.O. Box 3116, SE-103 62 Stockholm, Sweden
Pär Österholm: National Institute of Economic Research, Postal: National Institute of Economic Research, P.O. Box 3116, SE-103 62 Stockholm, Sweden

Abstract: Real housing prices in Sweden have roughly doubled the last 15 years. The rise in housing prices has coincided with a rise in household debt, sparking debate about both the presence of financial imbalances in the Swedish economy and the macroeconomic effects that a correction of these imbalances would have. In this paper, we conduct a quantitative assessment of the macroeconomic effects of a considerable decline in housing prices using a Bayesian VAR model. Results show that a 20 per cent drop in housing prices would lead to a recession-like impact on household consumption and unemployment. The impact would be even greater if falling housing prices coincided with a global economic downturn.

Keywords: Bayesian VAR; Housing prices; Household consumption; Unemployment; Small open economy

JEL-codes: C32; F43

22 pages, March 17, 2015

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