Financial liberalization and house price dynamics in Europe

This article investigates the determinants of house prices in a sample of European countries over the period 1970 to 2004. Focusing on the role of financial liberalization, we find that it has mainly affected the short-term dynamics of residential prices. In particular, the impulse effects on house prices of income and mortgage debt have become smaller. On the other hand, the effects of interest rates, past house prices and, to a lesser degree, stock market have strengthened. In other words, there seems to have been a certain ‘de-linking’ of short-term house price dynamics from income, whereas the housing market may have become more similar to a financial asset market, with interest rates and expectations of capital gains playing a more prominent role.