nr 083 - House Prices and Affordability - A First and Second Look Across Countries

DNB Working Papers
Date 30 January 2006

In this paper we analyze the development of house prices for eight different countries over the period 1970-2003. First we look at real house price dynamics of the United States, the United Kingdom, Germany, France, Italy, the Netherlands, Sweden, and Belgium. After discussing the observable similarities and variations in national house prices, we continue by analyzing structural differences in legislation and mortgage markets, which might help us to understand the cross-sectional variation in prices levels and price developments. Next, we construct a comprehensive first-buyer affordability model in which nominal house prices are corrected for household income changes and the net financing costs of mortgage payments. This model grants us a second look on the cross-section of international house price dynamics. We finish our study with first-buyer elasticity tests, which give a first glance on the stability of each price level on the basis of affordability. Keywords: house prices, affordability index, price-elasticity, stress test. JEL classification: E44, E64, G12, G18