Don't Look Up: House Prices in Emerging Europe

Don'tLookUp:HousePricesinEmergingEurope SerhanCevikandSadhnaNaikWP/22/236 2022 DEC ©2022InternationalMonetaryFundWP/22/236 IMFWorkingPaper EuropeanDepartment Don'tLookUp:HousePricesinEmergingEuropePreparedbySerhanCevikandSadhnaNaik1 AuthorizedfordistributionbyBernardinAkitobyDecember2022 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. Abstract Thispaperinvestigateshowhousingpricesrespondtoeconomic,financialanddemographicconditionsinemergingmarketsinEurope.Weusequarterlydatacovering10countriesovertheperiod1998–2022andimplementapanelquantileregressionapproachtoobtainagranularanalysisofrealestatemarkets.Overall,economic,financialanddemographicfactorsexplainthechangesinrealhousepricesinemergingEurope,withincomegrowthhavingthemostsignificantimpact.Quantileregressionestimationsshowthatincomegrowthmattersmoreforhigherhousingpricesthanthoseatthelowerquantilesofthepropertymarket.Wealsofindthatanincreaseinshort-termorlong-terminterestrateshaveaprice-dampeningimpact,indicatingthatahighercostofborrowingisassociatedwithlowerrealhouseprices.Theseresultsindicatethatthedownturninhousepricescoulddeepenwiththeloomingeconomicrecessionandsoaringinterestrates. JELClassificationNumbers: E20;E39;G12;G21;H24;P25;R21;R31 Keywords: Houseprices;quantileregression;instrumentalvariable;emergingmarkets;Europe Author’sE-MailAddress: scevik@imf.org;snaik@imf.org 1TheauthorswouldliketothankRobertBarclay,NinaBiljanovska,YunhuiZhao,andtheparticipantsofaseminarattheEuropeanDepartmentoftheInternationalMonetaryFund(IMF)fortheirinsightfulcommentsandsuggestions. I.INTRODUCTION Theglobaleconomyisinthemidstofsweepingrealignmentsthathaveasignificantbearingonallassetprices.Thesuddenandwidespreadsurgeinconsumerpricesafterdecadesoflowandstableinflationhasforcedcentralbankstotightenmonetarypolicyevenagainsttherisingriskofrecession.Higherinterestratesandgreateruncertaintyhaveraisedthecostofcapitalandputdownwardpressureonelevatedassetprices,includingthemostimportantofall—housing.Sincetheglobalfinancialcrisis(GFC)in2008,housingpriceshaveexperiencedanuninterruptedboomacrosstheworld,increasingasmuchas50percentinthecaseofemergingmarketeconomiesinEurope.Figure1illustratesthemajorupswinginrealhousepricesacrosstheregion,albeitatvaryingmagnitudes.Thereisempiricalevidencepointingtowardsastrongrelationshipbetweenmacroeconomicfundamentalsandthehousingmarket(GoodhartandHofmann,2008;Holly,Pesaran,andYamagata,2010;DavisandZhu,2011;Duca,Muellbauer,andMurphy,2021).Thereversalofexceptionallyeasyfinancingconditionsisthereforeaclearthreattohouseprices.Butthepropertysectoralsoplaysacriticalroleintheeconomy,withpotentialspilloversfromhousingmarketriskstoeconomicandfinancialdevelopments(Mian,Rao,andSufi,2013;Kohlscheen,Mehrotra,andMihaljek,2020).Therefore,inthelightofdownsideriskstotheglobaleconomyandfinancialmarkets,itiscruciallyimportanttounderstandthemaindeterminantsofresidentialpropertypricesandpotentialimpactofaslowdowninincomegrowthandasustainedincreaseininterestrates. ThisstudycontributestotheliteraturebyprovidingagranularinvestigationofhousepricedevelopmentsintendevelopingcountriesinEurope.Usingapanelofquarterlyobservationsin10emergingEuropeanmarketsduringtheperiod1998–2022,weempiricallydelvedeeplyintotheeconomic,financialanddemographicdeterminantsofhousingpricesanddrawpolicyimplications.Toprovideagranularanalysis,weuseapanelquantileregressionapproachandestimatetheimpactofexplanatoryvariablesondifferentpointsacrossthedistributionofhousingpricesinoursample.Thisallowsustoobservewhethertheunderlyingfactorsaffecthousesintheupper-pricerangedifferentlyascomparedtohousesinthelower- RealHousingPrices (Index,2010=100) 250 Figure1.HousingPricesinEmergingEurope RealHousePriceGrowth (Percent) 60 CZEESTHUNLVA 200POLRUSSVKSVN LTU TUR Inter-QuartileRange 150 100 50 0 1998Q42001Q22003Q42006Q22008Q42011Q22013Q42016Q22018Q42021Q2 50 40 30 20 10 0 -10 -20 -30 -40 -50 Average 1999Q42002Q32005Q22008Q12010Q42013Q32016Q22019Q12021Q4 Source:BIS;HaverAnalytics;andauthors’calculations. pricerange.Overall,ourempiricalanalysisindicatesthateconomic,financialanddemographicfactorsexplainthechangesinrealhousepricesinemergingEurope,withincomegrowthhavingthemostsignificantimpact.ThisresultisconsistentwithincomeconvergencetowardstherestofEurope.WhileariseinrealGDPgrowthisassociatedwithanincreaseinhousingprices,thiseffectisnothomogenousacrosstheconditionaldistributionofrealhouseprices.ThecoefficientonrealGDPgrowthforthe25thpercentileissmallerthantheincomeelasticityofhousepricesinthe75thpercentile.Thisdifferencebecomesevenmoreapparentwhenwefocusonthebottom5thpercentileandthetop95thpercentile.Thesequantileregressionestimationsshowthatincomegrowthmattersmoreforhigherhousingpricesthanthoseatthelowerquantilesofthepropertymarket.Second,wefindthatinterestratesarealsoanimportantfactorforthehousingmarketinemergin