No. 863 - House price cycles in emerging economies

In this paper, I investigate the characteristics of house price dynamics for a sample of 16 emerging economies from Asia and Central and Eastern Europe, over the period 1995-2011. Linking housing valuations to a set of conventional fundamental determinants - relative to both the supply and the demand side of the market, institutional factors and other asset prices - and modeling short-term price dynamics - which reflect gradual adjustment to underlying fundamentals - I draw conclusions about the existence, and the basic nature, of house price overvaluation (undervaluation). Overall, I find that actual house prices in the sample of emerging economies are not overly disconnected from fundamentals. Rather, they tend to reflect a somewhat slow adjustment to shocks to the latter. Moreover, the evidence that housing valuations may be driven by overly optimistic (or pessimistic) expectations is in general weak, even if this feature may have played a more prominent role up to the end of 2007, before the onset of the recent global real and financial crisis.