Swedish House Prices and Fundamentals: A Study of the Price Development of Small Houses from 1986 - 2005

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This thesis uses almost 20 years of quarterly data to examine the relationship between prices of residential real estate and fundamental variables in Sweden. Real estate prices have increased substantially in the investigated period, also in relation to disposable income and rents. However, the results show that the development of residential real estate prices can be well explained by fundamental variables. The population aged 35-54 has a positive relationship to real estate prices, while population aged 60-64 has a negative relation. Increases in employment, construction costs, GDP, and household debt are all associated with increasing real estate prices. The interest rate of the three month T-bill rate on the other hand has a negative relation to real estate prices. Furthermore, a cointegration and error correction test reveals the existence of a long run relationship between real estate prices and fundamental variables. These results, however, do not indicate that prices of residential real estate cannot fall. Instead it is likely that demographic change towards an olde...