Long-run drivers and short-term dynamics of Swedish real house prices

Abstract

Purpose: This paper aims to assess the long-run drivers and short-term dynamics of real house prices in Sweden for 1986Q1 to 2016Q4. More specifically, the author examines the extent to which real house prices are determined by affordability, demographics and asset price factors. Design/methodology/approach: The author conducts a cointegration analysis and applies a vector autoregression model to examine the long- and short-run responsiveness of Swedish real house prices to a number of key categories of fundamental variables. Findings: The empirical results indicate that house prices will increase in the long run by 1.04 per cent in response to a 1 per cent increase in household real disposable income, whereas real after-tax mortgage interest and real effective exchange rates show average long-term effects of approximately – 8 and – 0.7 per cent, respectively. In addition, the results show that the growth of real house prices is affected by growth in mortgage credit, real after-tax mortgage interest rates and disposable incomes in the short run, whereas the real effective exchange rate is the most significant determinant of Swedish real house appreciation. Originality/value: The impact of the two lending restrictions been implemented after the financial crisis – the mortgage cap in October 2010 and the amortization requirement in June 2016 – are ineffective to stabilize the housing market. This suggests that macroprudential measures designed to ease pressure on housing prices and reduce risks to financial stability need to focus on these fundamentals and address the issues of tax deductibility on mortgage rates and the gradual implementation of debt-to-income limits to contain mortgage demand and improve households’ resilience to shocks.