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AN ECONOMETRIC DEMAND–SUPPLY MODEL FOR SWEDISH PRIVATE HOUSING

A housing market model for Sweden has been estimated on semi-annual data for 1970-97 by separately modelling the demand and the supply sides, specified in error correction form. On the demand side in the short run house prices adjust to the changes in the real after-tax long interest rate, financial wealth, the employment rate, rents and, finally, population. There is an underlying long-run relationship between real house prices and the following ratios: debt to income, debt to financial wealth, private housing stock to income, the stock of rental housing (flats) to the private housing stock, and the real aftertax long interest rate. The supply side, based on Tobin's q -index, the short interest rate and stock market returns, generates the investment flow which determines the evolution in stock. The results indicate that even in a turbulent period, Swedish house prices and housing investment are tracked quite well with this specification. The importance of the simulations and their usefulness to Swedish policy-makers is discussed. According to our model, many factors were instrumental in producing the house price boom of the late 1980s. Initial debt levels were low as were real house prices, giving scope for rises in both, and these became more important as a result of financial liberalization, though partly offset by higher real interest rates. We also discuss the controversy over the causes of the 1991-93 recession in the context of the 1991 tax reform. Tests of model adequacy indicate that the housing price and Tobin's q housing investment models are stable and robust and satisfy intuitive theoretical prerequisites.