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Assessing euro area residential property prices through the lens of key fundamentals*. L. Gattini European Central Bank December 2011. * This presentation represents the views of the presenter which doÂ notÂ necessarily correspond with those of the ECB. Outline. Background.
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European Central Bank
* This presentation represents the views of the presenter which do not necessarily correspond with those of the ECB.
2. Data and modelling approach
4. Other approaches for the euro area & additional results for countries
Two approaches to the analysis of house price developments:
Mixed set of potential explanatory variables
“Forecasting and assessing euro area house prices through the lens of key fundamentals” – Gattini & Hiebert, ECB WP 1249
- (S)VECM system more suitable for policy analysis - structural decomposition is useful to analyse the responsiveness of the
system – k*(k − 1)/2=6 restrictions imposed
- Common trend approach – King, Plosser, Stock and Watson (1991), Iacoviello (2002)
- We distinguish between structural shocks with permanent and transitory effects
Permanent shocks - baseline identification imposes zero restrictions on the first and second columns of the D(1) elements
Housing market technology shock
- Technological shocks to the construction industry - rarely observed
- Motivated by changes in the regulatory framework (e.g. building regulations and/or the modification of various zoning laws)
- This could cause changes in housing production virtually indistinguishable from housing building technology - Matsuyama (1999)
The impact on real interest rates would be ambiguous
- A substitution effect between categories of investment should nullify possible discrepancies in terms of returns between different categories of investment in the long-run
- Sectoral specific technology shocks can have an impact in the short-run on interest rates – zero in the long-run given counterbalancing effects
Economy wide technological shock
- Expected to exert some impact on all the variables in the system
Financing cost shock
The outcome of features that permanently alter interest rate risk premia, such as financial innovation or –specific to the case of euro area– convergence in the run up to European Monetary Union.
Transitory shocks - A two way short-run interaction between real interest rate and real income has been excluded via imposing two zero restrictions - standard lags in the monetary policy transmission mechanism
Housing demand shock - The temporary shift in preferences toward housing assets
- Rationalized in the context of literature on a time-varying housing risk premia (seeWeeken, 2004)
- A temporary shift from non-residential demand to residential demand