Academic journal article Journal of Housing Research

The Diffusion of Housing Price Movements from Center to Surrounding Areas

Academic journal article Journal of Housing Research

The Diffusion of Housing Price Movements from Center to Surrounding Areas

Article excerpt

Abstract

Previous empirical research shows that there are strong interrelationships between regional housing markets in a number of countries. There are many reasons why housing price changes in central areas may lead housing price movements in surrounding regions. These reasons include structural differences and economic interdependence between regions, as well as informational factors. This paper studies the hypothesis that there is a lead-lag relation between housing price movements in central and surrounding areas. Vector autoregressive and vector error-correction models using quarterly data from the Finnish housing markets from 1987 to 2004 are estimated. The results show that housing price changes diffuse first from the Helsinki Metropolitan Area (HMA), the main economic center in Finland, to the regional centers and then to the peripheral areas. Inside HMA, instead, housing price changes in the suburbs have Granger caused price movements in the city center.

Introduction

Regional housing price movements are likely to be of importance for consumer expenditure, the labor market and housing portfolio allocation. Furthermore, the predictability of housing appreciation can be used, for example, to optimally time completion of new dwellings or transactions concerning second-hand dwellings. The dynamics of housing price movements are also of interest because they throw some light on the operation of the housing market. Nevertheless, there still appears to be little applied work on the regional housing price dynamics.

It is often assumed that housing price movements diffuse from the economic centers to the surrounding regions. This view is supported by some empirical studies examining regional housing price dynamics (e.g., Meen, 1996; and Berg, 2002). The reasoning behind the leading role of main economic centers has often been based on an assumption that business cycles hit economic centers first and peripheral areas later. There are, however, also other reasons, especially informational factors, that may cause or strengthen the leading role of main economic regions. Inside a metropolitan area, however, it is difficult to say straightforwardly whether the center is likely to lead the suburbs or vice versa. In any case, proper empirical analysis is needed to examine if there are notable lead-lag relations between housing price movements in the center and surrounding areas.

This paper examines lead-lag relations between regional housing markets. The relationship between housing price movements in central and surrounding areas is of a particular interest in the study. At first, potentials causes of lead-lag relations are considered theoretically. After the theoretical discussion, empirical analysis is conducted to study if housing price changes diffuse from central areas to more peripheral regions (i.e., if housing appreciation in central areas leads housing price movements in surrounding regions). This is done by employing vector autoregressive and vector error-correction models. The data used in the analysis is quarterly hedonic housing price indices from 1987 to 2004 concerning different housing markets in Finland. First, the dynamics between the center and the suburbs of the Helsinki Metropolitan Area (HMA) are examined. Second, the hypothesis that housing price changes in other parts of the country follow those of HMA is analyzed. Third, lead-lag relations between some regional centers and provinces surrounding them are investigated.

In the next section, the potential reasons for a lead-lag relation between housing markets in center and surrounding areas are discussed. The paper proceeds to a review of relevant literature, followed by a delineation of the data, and a discussion of the methodology and the findings. The final section presents concluding comments.

Dynamics of Regional Housing Price Movements-Theoretical Consideration

Housing price levels may differ substantially between different regions, and different regional housing markets can be viewed as separate assets. …

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