House price determinants in transition and EU-15 countries

Abstract

This article studies house price developments in six European countries: Croatia, Estonia, Poland, Ireland, Spain and the United Kingdom. The main goal is to explore the factors driving the rise of house prices in transition countries. Because house price increases in the last two decades are not peculiar to transition countries, the analysis is extended to three EU-15 countries that have recorded house price rises. The similarities and differences between the two groups of countries in terms of house price determinants can thus be explored. In the first part of the empirical analysis VAR is employed to detect how GDP, housing loans, interest rates and construction contribute to real house price variance. In the second part of the analysis multiple regression models are estimated. The results of both methods suggest that the driving forces behind house price inflation in both groups of countries are very similar and encompass the combined influence of house price persistence, income and interest rates.