Quantitative Easing and Bubble Formation in Real-Estate : A study of the relationship between novel monetary policies and speculative bubbles in the Swedish real-estate market

Abstract: This thesis aims to study how much of price appreciations on the Swedish real-estate market in recent times have been fundamentally warranted, as well as if the unconventional monetary policies implemented by the Swedish central bank have had any interaction with these price escalations. The methodology employed to research this is divided into two parts. Firstly, a bubble component time series has been computed using a Kalman filtering technique in a state-space model in which the bubble is inferred from a fundamental equation. The next step involves studying the dynamics between the bubble element vis-a-vis the quantitative easing policies implemented by Riksbanken. This procedure involves estimating vector autoregressive models in which several policy variables are included in the nexus and analyzed simultaneously to better grasp how QE transmits and impacts the component for the bubble. The empirical results from the first segment designate that price inflation on the Swedish housing market has become more and more principally unjustifiable throughout the sample. However, no significant inference may be made in this stage as to whether or not the market is influenced by a speculative bubble. In the dynamic system, some, yet thin evidence is found of quantitative easing policies preceding the evolvement of exuberance in house prices. Conclusively, this thesis affirms most of the growth in the non-fundamental part of prices to an expansion of credit, which in turn cannot be accredited to the policies of the Swedish Riksbank. Only a slight expectational effect is found and therefore we conclude that quantitative easing only has a trivial impact on the development of a speculative bubble in the market for real-estate.