OUSE PRICES IN THE EURO AREA: THE FUNDAMENTALS AND THE ROLE OF FINANCIAL MARKET STRESS

The paper aims to assess whether financial market stress is associated with real house prices in the euro area. Building on the theory of house prices fundamentals, we first apply the second generation cointegration tests and reject a stable long-run relationship between house prices and the variables identified in the theory as their main determinants (fundamentals). Short-run panel data models are then estimated, relating real house prices to their fundamentals and the financial market stress. The results imply that the real GDP per capita growth rate and the loans to households for house purchase are the main determinants of real house prices growth in the short run. Financial market stress is significantly associated with real house prices changes only in some euro area countries. Different panel data estimators are used to show that heterogeneity and cross-section dependence needs to be accounted for to obtain robust estimates. The differences between two group of euro area countries (the PIIGS and the non-PIIGS euro area) are also compared.