Fundamental Real Estate Prices: An Empirical Estimation with International Data



We propose two alternative models to estimate fundamental prices on real estate markets. The first model is based on a no-arbitrage condition between renting and buying. The second model interprets the period costs as the result of market equilibrium between housing demand and supply. We estimate both models for the USA, the UK, Japan, Switzerland, and the Netherlands. We find that observed prices deviate substantially and for long periods from their estimated fundamental values. However, we find some evidence that, in the long-run, actual prices tend to return to their fundamental values progressively. This result is due to both impulse–response functions and forecast analyses. In particular, we find that using the fundamental price significantly increases the accuracy of out-of-sample long-term forecasts of the price.


Real estate market Fundamental price Long-term convergence Long-term forecast 

JEL Classification

R31 C51 D58 C53 


  1. Ayuso, J., & Restoy, F. (2006). House prices and rents: An equilibrium asset pricing approach. Journal of Empirical Finance, 13, 371–388.CrossRefGoogle Scholar
  2. Case, K. E., & Shiller, R. J. (2003). Is there a bubble in the housing market? Brookings Papers an Economic Activity, 2, 299–362.CrossRefGoogle Scholar
  3. Campbell, J. Y., Lo, A. W., & MacKinlay, A. C. (1997). The econometrics of financial markets. Princeton: Princeton University Press.Google Scholar
  4. Campbell, J. Y., & Shiller, R. J. (1988). The dividend–price ratio and expectations of future dividends and discount factors. Review of Financial Studies, 3, 195–228.CrossRefGoogle Scholar
  5. Cho, M. (1996). House price dynamics: A survey of theoretical and empirical issues. Journal of Housing Research, 7, 145–172.Google Scholar
  6. Collyns, C., & Senhadji, A. (2002). Lending booms, real estate bubbles and the asian crisis. IMF Working Paper, WP/02/20.Google Scholar
  7. Dickey, D. A., & Fuller, W. A. (1979). Estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427–431.CrossRefGoogle Scholar
  8. Dougherty, A., & Van Order, R. (1982). Inflation, housing costs, and the consumer price index. American Economic Review, 72, 154–164.Google Scholar
  9. Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation and testing. Econometrica, 55, 251–276.CrossRefGoogle Scholar
  10. Flavin, M., & Yamashita, T. (2002). Owner-occupied housing and the composition of the household portfolio. American Economic Review, 92, 345–362.CrossRefGoogle Scholar
  11. Flood, R. P., & Hodrick, R. J. (1990). On testing speculative bubbles. Journal of Economic Perspectives, 4, 85–101.Google Scholar
  12. Girouard, N., Kennedy, M., van den Noord, P., & André, C. (2006). Recent house price developments: The role of fundamentals. OECD, Economics Department Working Papers No. 475.Google Scholar
  13. Hamilton, J. D. (1994). Time series analysis. Princeton: Princeton University Press.Google Scholar
  14. Herring, R., & Wachter, S. (1999). Real estate booms and banking busts: An international perspective. Wharton FIC WP 99–27.Google Scholar
  15. Hilbers, P., Lei, Q., & Zacho, L. (2001). Real estate market developments and financial sector soundness. IMF Working Paper WP/01/129.Google Scholar
  16. Himmelberg, C., Mayer, C., & Sinai, T. (2005). Assessing high house prices: Bubbles, fundamentals, and misperceptions. Journal of Economic Perspectives, 19, 67–92.CrossRefGoogle Scholar
  17. Holly, S., & Jones, N. (1997). House prices since the 1940s: Cointigration, demography and asymmetrics. Economic Modelling, 14, 549–565.CrossRefGoogle Scholar
  18. Krugman, P. (1998). What happened to Asia?
  19. Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hpypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54, 159–178.CrossRefGoogle Scholar
  20. McCarthy, J., & Peach, R. W. (2004). Are home prices the next “bubble”? FRBNY Economic Policy Review, December.Google Scholar
  21. Meen, G. (2006). Ten new propositions in UK housing macroeconomics: An overview of the first years of the century. Working Paper, University of Reading.Google Scholar
  22. Van den Noord, P. (2006). Are house prices nearing a peak? A probit analysis for 17 OECD countries. OECD, Economics Department Working Papers No. 488.Google Scholar
  23. Pain, N., & Westaway, P. (1997). Modelling structural change in the UK housing market: A comparison of alternative house price models. Economic Modelling, 14, 587–610.CrossRefGoogle Scholar
  24. Phillips, P. C. B., & Perron, P. (1988). Testing for unit root in time series regression. Biometrika, 75, 335–346.CrossRefGoogle Scholar
  25. Poterba, J. M. (1984). Tax subsidies to owner-occupied housing: An asset-market approach. Quarterly Journal of Economics, 99, 729–752.CrossRefGoogle Scholar
  26. Poterba, J. M. (1992). Taxation and housing: Old quastions, new answers. American Economic Review, 82, 237–242.Google Scholar
  27. Schwab, R. M. (1982). Inflation expectations and the demand for housing. American Economic Review, 72, 143–153.Google Scholar
  28. Sinai, T., & Souleles, N. S. (2005). Owner-occupied housing as a hedge against rent Risk. The Quarterly Journal of Economics, 102, 763–789.CrossRefGoogle Scholar
  29. Weeken, O. (2004). Asset pricing and the housing market. Bank of England Quarterly Review, Spring 2004.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Swiss National Bank, Financial StabilityZurichSwitzerland
  2. 2.Swiss Banking InstituteUniversity of ZurichZurichSwitzerland

Personalised recommendations