Investment in Residential Building: A Time-series Analysis with Aggregate Finnish Data

Abstract

In the paper the supply side of the housing market – investment in residential building – is examined by means of modern time series econometrics. The data are seasonally unadjusted quarterly series from Finland over the period 1979–1996. The housing market is first analyzed as a dynamic system of two endogenous variables, real house prices and real housing investment. The estimated relationships indicate that real house prices have a strong positive impact on housing investment in the long-run. The estimated long-run price elasticity of housing investment is 0.73. House prices are determined mainly by the factors that are exogenous to the system, but influence the demand for housing. At the second stage the housing investment equation is estimated by the method of instrumental variables treating the expected house price change as an endogenous variable. Estimation results suggest that the suppliers of new housing take account of future price changes in making investment decisions. The short-run response from expected house price changes to housing investment is 0.4 and the implied long-run response 0.75 in the model that does not include financial variables as exogenous regressors. The introduction of financial variables into the model reveals that housing investment is positively influenced by the lagged changes in the housing loan stock suggesting that credit rationing affects more the flow supply of new housing than the demand for housing.

• ISSN: 1236-7184
• ISBN: 952-5071-12-X
• Publication in PDF-format