Do stock prices affect house prices? Evidence for the Netherlands

Abstract

The relationship between stock prices and house prices is investigated by comparing different segments of the Dutch housing market. This connection is strongest for the most expensive segment, and is also related to homeowners’ stock market exposure. These findings support the idea that equity is a determinant of house prices.

Acknowledgements

We thank Bob Chirinko, Aerdt Houben, Greg Sutton and Job Swank for useful comments on earlier versions. The views expressed in this paper do not necessarily reflect those of De Nederlandsche Bank.

Notes

In this context, it can be argued that decreases in interest rates after the stock market correction since 2000 may have lengthened the time lag between equity and house prices (Bank for International Settlements, 2003).

According to augmented Dickey–Fuller tests, all variables are I(1) while the Johansen procedure points at the presence of at least one co-integrating relationship. Hence, we estimate the VAR in levels, in order to account for long-term relationships between the data. The number of lags is based on the Akaike information criterion. We also considered alternative lag structures and estimated the VAR with annual growth rates instead of levels. Only the latter led to different impulse-response patterns – in particular, a faster mean reversion – but not to different conclusions.

This is striking, as one may expect that income is an important determinant of spending and borrowing capacity. We repeated the analysis with GDP instead of disposable income, but this hardly affected our results.

We also performed simulations with identified VARs, by imposing several causal orderings, with very similar outcomes.

Total household equity wealth is published by the Netherlands Bureau for Economic Analysis on an annual basis. We transformed this series into quarterly figures through interpolation.