Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153453
Authors: 
Hiebert, Paul
Sydow, Matthias
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1019
Abstract: 
We apply a dynamic dividend-discount model to analyse unexpected housing returns in a panel of eight euro area countries which together comprise 90% of euro area GDP. The application of this model allows for a de-composition of house price movements into movements in rent (cash-flow) and expected return news components. The empirical application of the model involves the estimation of a panel vector autoregressive model (VAR) for four variables –excess return to housing, rents, the real interest rate and real disposable per capita income– using quarterly data over the period 1985-2007. This empirical investigation yields two main findings. First, the bulk of the variability of house price move-ments in the panel of countries analysed can be attributed to movements in the rental yield. Indeed, perturbations to rents appear to result in a one-to-one analogous movement in house prices over the long term once controlling for changes in expected returns. Second, evidence from the dynamic profile of shocks along with the negative co-movement between changing rental yield expectations and changing expected returns on housing assets would suggest that euro area house prices overreact to news.
Subjects: 
cash flow news
house price
housing rental yield
panel VAR estimation
return decomposition
JEL: 
R21
C33
G12
Document Type: 
Working Paper

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