Modelling regional house prices

Abstract

We develop a panel model for regional house prices, for which both the cross-section and the time series dimension is large. The model allows for stochastic trends, cointegration, cross-equation correlations and, most importantly, latent-class clustering of regions. Class membership is fully data-driven and based on the average growth rates of house prices, and the relationship of house prices with economic growth. We apply the model to quarterly data for the Netherlands. The results suggest that there is convincing evidence for the existence of two distinct clusters of regions with pronounced differences in house price dynamics.

Acknowledgements

We thank participants at the Applied Economics Ruby Anniversary Conference (Cambridge, September 2008) for useful comments, and René Segers for assistance with the graphs.

Notes

¹ Recall that we demeaned all other variables the model, so the intercepts represent the average growth rates.