Fundamentals of property pricing : The macroeconomic relationship with the Swedish housing market

Abstract: This essay studies the relationship between macroeconomic fundamentals and the price level within the Swedish housing market. Previous empirical research has heavily debated whether there is a long run or short run relationship. The aim of this essay was therefore to analyse the nature of the relationship following the post-crisis period of the 1990’s. This was done in order to determine whether the price level reverts to a long run equilibrium with economic fundamentals or if the market inflates once again following imbalances between supply and demand alongside decreased risk aversion from the credit institutes. The results showed that there were no cointegrative relationship in the longer run. Furthermore, to show that there is not a complete seperative relationship between fundamental factors and the housing market, a short run model was established. The short run model showed significant results for user cost determinants. Concluding from this essay is that supply restrictive factors, such as the unavailability of land, have caused the supply to not match the appropriate rate of growth with demand. Alongside the growth of disposable income, generous tax deductions on interest payments and the decreased risk aversion this has led to the exorbitant price increase during the past two decades.