Browsing by Author "Saarinen, Lauri"

The thesis examines house price formation in the Helsinki metropolitan area. Especially the price appreciation following financial liberalisation of the late 1980’s and the subsequent price decline of the early 1990’s recession mark the development of house prices. During the 2000’s house prices have increased rapidly with the exception of the slump during the financial crisis. This thesis focuses on explaining the aforementioned development with emphasis on the long-run aspect in both theoretical and empirical examinations. The primary goal is in studying long-run interdependence between house prices and fundamental determinants mentioned in theoretical and empirical literature. Based on the achieved results it is possible to draw conclusions on the sustainability of the price level as well as study the effects of various fundamentals on the metropolitan area price level. The thesis is separated into a theoretical and an empirical section which makes use of econometric methods in modelling house prices. The long-run relationship between house prices and selected fundamental variables is examined using cointegration analysis. The fundamentals and house prices are modelled in a vector error correction framework central to cointegration analysis. Alongside house prices, household disposable income, mortgage interest rates, metropolitan area total net migration and the stock of housing loans describing household indebtedness are introduced into the system. The quarterly data are compiled from Statistics Finland and Bank of Finland databases for the time period 1983–2012. The central result of the thesis is a long-run equilibrium model between house prices and the fundamental determinants. The model is found to work satisfactorily as the results accord with theory and the results are statistically significant. In addition, the results are in line with previous empirical studies conducted in Finland. Furthermore it is discovered that mortgage interest rates, household indebtedness and migration patterns have been notable factors in determining house prices, especially towards the end of the examination period. The achieved results on short-run dynamics also provide support to the estimated long-run model. A key finding considering the short-run dynamics is the sluggish adjustment of house prices towards their long-run level. Based on the results of this thesis, house prices in the Helsinki metropolitan area have exceeded the estimated long-run equilibrium price level for a prolonged period. This phenomenon can be explained by demand side factors including high net migration to the region as well as low mortgage rates encouraging mortgage lending. On the other hand, inelastic supply and scarcity of land specific to urban areas restrain the rapid unravelling of excess demand in the housing market. It is thus possible, that in the future house prices will adjust downward toward their long-run equilibrium level.