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Tobin’s q – what to do?

This thesis concerns the Swedish housing market, which is under constant debate. Prices keep increasing and many believe that this trend will consist due to low interest rates, high demand and lack of attractive building land. This tendency, resulting in a housing shortage, is particularly evident in the metropolitan areas. 
 
Earlier research states that the well-known Tobin’s q theory has a short-run, as well as a long-run, impact on housing supply and housing investment. Therefore, this thesis seeks to analyse whether Tobin’s q can contribute with an increased understanding of the underlying reasons behind the ongoing housing shortage in Sweden. Except for the usage of up-to-date data, our study additionally presents new perspectives in terms of regional division and dwelling types. 
 
The relationship between regional dwelling starts and Tobin’s q is tested through an Error Correction Model as well as standard OLS, depending on the cointegrating relationship. The results of the estimations show that short-run relationships are found for all metropolitan areas concerning one- or two-dwellings, yet only for one metropolitan area upon investigating multi-dwellings. Furthermore, there is a long-run relationship and error correcting mechanism between building starts and Tobin's q for a minority of the examined regions and dwelling types. In the cases of statistically insignificant estimation results, this is interpreted as an indication of the housing markets in these regions not functioning properly and there are hence other factors affecting the housing supply. It is further concluded that an intervention on these markets is necessary to potentially improve the market conditions, ideally resulting in the number of dwelling starts being directly related to indications of Tobin’s q.