Regional house prices An application of a two-equation model to the Swedish housing market

Purpose - The aim of this study is to investigate why housing prices differ between regions, and to estimate the speed-of-adjustment. Design/methodology/approach - A variety of factors explains the differences in the prices of single-family houses. Changes in disposable income over time and across regions as well as the cost of capital are important determinants. The model is based on a DiPasquale and Wheaton model where the developments of the house prices are a function of macroeconomic factors such as economic growth, changes in employment and interest rate. It is estimated on a two-equation error correction model: first, the long-run price equation and, second, a short-run price model. Findings - The estimates suggest that the speed-of-adjustment ranges from 16 to 78 per cent (around 50 per cent on average) depending on the region. In regions with a low population density, higher price adjustment rates are observed. Moreover, the speed-of-adjustment is higher in an upturn economy than in a downturn reflecting that negative housing stock adjustments is much slower than positive adjustments. Originality/value - The main contribution is that the speed-of-adjustment to the long-run equilibrium price for 21 regions is estimated instead of at a national level and, furthermore, cyclical asymmetry in responses is tested and such differences are found. It is estimated that the rate of adjustment to long-run equilibrium price varies considerably between regions.