The Great Appreciation : Impact of Sentiment Shocks and Macroprudential Policy to Fundamental Price Spreads in Scandinavian Housing Markets

Sammanfattning

This paper aims to investigate whether changes in economic sentiment and major policy shifts have had any significant impact on Scandinavian real housing prices relative their fundamental value post year 2000. Fundamental housing price indices for each constituent of the region are estimated from macroeconomic fundamentals in a VAR framework. We then estimate impulse response functions from another VAR to test the effects of survey-based economic sentiment on the fundamental price spread in each housing market. In addition, we investigate how major housing related policies implemented during our sample period have affected the fundamental price spreads in an ARDL framework. The study concludes a substantially undervalued Danish housing market post 2008 and a marginally yet persistently overvalued Norwegian market, whereas Swedish and Finnish housing prices have developed fairly in line with levels motivated by macroeconomic fundamentals. Changes in economic sentiment show limited effect on closing the fundamental price spread in Denmark, but no significant impact on any other housing market considered. The elected policies representing major housing market shifts have had significant negative impact on the real housing price development in Denmark and Norway but not in Finland and Sweden. The policy shift in Finland has significantly yet marginally closed the fundamental price spread during the period investigated. Interestingly, implemented LTV- and DTI caps in Sweden have neither affected real aggregate housing prices nor the fundamental price spread.