Economic fundamentals and housing market

Abstract

This paper examines the causes of housing cycles during 1986–1994 in California using vector autoregressive (VAR) and variance decomposition technique. The paper tries to compare the effect of speculative behavour of landlords with economic fundamentals in boosting the housing demand. The empirical results suggest that economic fundamentals affected the housing market slightly during the housing boom of 1986–1990. Speculative behaviour and expectation of capital gain played a stronger role in stimulating the housing demand than economic fundamentals. The model, however, cannot explain the housing bust of 1990–1994. The results suggest that the main reason behind sluggish demand in 1990–1994 lies outside the economic fundamentals and poor expectation of capital gain.