Nordic house price bubbles?

Abstract

This article estimates fundamental house prices for Denmark, Finland, Norway, and Sweden over the past 20 years. Fundamental house prices are determined by per capita income, the housing stock per capita, and the real after-tax interest rate. The trajectory of fundamental prices are compared to actual house price developments for the period 2000q1-2019q4. My results suggest that house prices were overvalued in all countries in the years preceding the global financial crisis, but that prices quickly returned to equilibrium following the ensuing housing market bust. Results suggest that house prices were undervalued in Denmark and Finland towards the end of 2019, and that they were overvalued in Norway and Sweden. There are no signs of explosive house price developments in Finland, Norway, or Sweden over the sample period. There are, however, signs of explosive house price dynamics in Denmark before the crash in 2007. My results suggest that interest rate changes have a major impact on fundamental house prices in all countries, and that interest rate developments have been important drivers of fundamental house prices over the past 10 years.