House-price effects on the economy and households

Frederik Blixen-Finecke

Student thesis: Master thesis


Housing is one of the largest contributors to GDP, especially during the recent years of housing boom. Movements in house-prices, on the other hand, have different effects. There exists wide disagreement about how moving house-prices affect the economy and the household. Based on a theoretical framework, presented by Modigliani, but having its root back to Keynes, answers have been sought on the effect of notably increasing house prices. Empirical testing covering the periods of 1973 to 2009 and 1980 to 2009 confirmed the assumption that house-prices have a real effect on the economy. The real effects of house-prices means than on average for the period 1980-2009, consumption would increase by 0.02 % if house-prices increased 1 %. Examination of the movements in the balance-sheet as a consequence of rising house-prices revealed that it is especially through patterns of borrowing, where the effects show up. This is because both equity withdrawal for consumption and equity withdrawal used to buy a more expensive house, increases the amount of liabilities. The crucial role of credit availability in order to extract equity from the house-value was thus confirmed. The lower elasticity obtained (0.01%), when empirically testing a period including a period prior to 1980, where innovation and products scope within the mortgage market was much less pronounced, reflected the important role of credit via the empirical model. The investigation of determinants of house-prices for the Danish market, revealed that interest rates, housing stock supply, demography and an affordability ratio (represented by interest payments), are the current and especially future determinants of house-prices in Denmark. If was found that there is reason to believe that the momentarily rather healthy financial positions currently describing the status of the Danish households, despite two years of falling prices, could easily change to worse in the near future. This prediction relates to a currently very low interest rate, and an effect of the number of first-time buyers being on a downward slope, potentially depressing future house-prices.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2010
Number of pages141