On the determination of housing production and housing prices in the Finnish housing market
Abstract
The main focus of the study is on the econometric modelling of the short-term variation and mutual interdependence of housing production and housing prices. Housing production is explained using an error correction model, in which housing production is adjusted in relation both to the deviation between the desired and actual level and to the recent development of the factors affecting the desired level. The most important explanatory variables are the ratio of housing prices to construction costs and the real interest rate.
Households residing in the existing housing stock and considering a change of dwelling constitute the passive segment of the housing market. Housing prices adjust in accordance with the difference between the desired housing demand of the passive segment and the housing stock that is fixed in the short term — the so-called Walrasian price adjustment mechanism. In addition, the market situation of the active segment, which comprises on the demand side young people of family-formation age and on the supply side newly completed dwellings, directly affects the pace of price adjustment.
The dynamic analysis shows that the model system can exhibit a prolonged state of disequilibrium, during the correction of which both prices and production — which follows prices with a lag — fluctuate cyclically. Transaction costs associated with changing dwellings in the passive segment are central to interpreting the slow adjustment. From the perspective of market equilibration, the division into active and passive segments highlights the role of the rental market, such that its dysfunction increases the significance of the active segment as a source of price fluctuations. (AI translation)
- ISSN: 0358-5980
- ISBN: 951-9282-42-4
