Interaction between housing prices and household borrowing - the Finnish case

Housing prices and household borrowing are expected to be tightly connected to each other. Better availability of credit eases liquidity constraints of households, which is likely to lead to higher demand for housing. On the other hand, housing prices may significantly influence household borrowing through various wealth effects. Employing time series econometrics this study shows that since the financial liberalization in the late 1980s there has been a significant two-way interaction between housing prices and housing loan stock in Finland. Before the financial deregulation the interaction was substantially weaker. Furthermore, housing appreciation has a notable positive impact on the amount of consumption loans withdrawn by households. It appears that there is no similar relationship between stock price movements and household borrowing. Understanding the two-way interaction between housing prices and credit is of importance, since the interdependence is likely to augment boom-bust cycles in the economy and increase the fragility of the financial sector.lending, borrowing, housing, dynamics

Momentum and mean reversion in regional housing markets: Evidence from variance ratio tests

This study adds to the literature on mean aversion and mean reversion in housing prices. In contrast with the previous related literature, the persistence and reversion characteristics are studied by computing variance ratios using Kim's (2006) Wild bootstrapping and by investigating horizons up to 10 years. The variance ratios clearly indicate that housing prices do not follow random walk in any of the 15 Finnish cities included in the analysis. Instead, momentum in housing price growth is longlasting and considerable in size. Since the eventual reversion is substantially weaker than the initial mean aversion, housing is notably riskier asset in the long term than suggested by variances computed from quarterly or annual price movements. The results also show that the momentum and reversion patterns may substantially vary between regional housing markets. These differences influence the optimal housing portfolio allocation and highlight one more reason why it is complicated to use country level housing price data when analyzing the optimal portfolio allocation or housing price dynamics.housing prices; momentum; mean reversion; variance ratio; portfolio allocation

Dynamic linkages between housing and lot prices: Empirical evidence from Helsinki

The price of vacant land zoned for housing is expected to be tightly linked to housing prices. In informationally efficient markets, vacant lot price movements should not lag changes in housing prices. In practice, however, the leading role of housing appreciation with respect to vacant lot price growth may be caused by factors such as thin trading and lack of publicly available data on transactions in the lot market. Based on a vector error-correction model employing quarterly data from the Helsinki Metropolitan Area over 1988Q1-2008Q2, this study shows that housing price movements lead price changes in the market for vacant lots and housing prices react to shocks in the demand side fundamentals more rapidly than lot prices. Overall, the empirical results give support to the hypothesis that house prices respond to shocks influencing the value of developed land first, after which the price level of vacant lots reacts to the information revealed by housing prices. Hence, the results indicate that the market for lots is more informationally inefficient than the housing market. Furthermore, the empirical findings suggest that construction costs too react to income and interest rate shocks.Housing, land, lot prices, dynamics, construction costs

Empirical application of the housing-market no-arbitrage condition: problems, solutions and a Finnish case study

The often used housing price-to-income and housing price-to-rent ratios are problematic in housing market analysis and may result in misleading conclusions. Instead, the no-arbitrage condition of housing market is a theoretically sound basis to evaluate if housing prices are misaligned. Unfortunately, empirical applica-tion of the no-arbitrage condition has notable complications. This article reviews these complications and suggests some solutions to them. The use of implied expected appreciation derived from the no-arbitrage condition is recommended. It is also claimed that the real appreciation is better to use than the nominal one in the no-arbitrage computations. Furthermore, the paper shows that the maintenance costs as a fraction of housing price vary substantially in time and location, which may significantly affect the equilibrium housing price level relative to rental prices. An empirical application of the no-arbitrage relation using data from ten Finnish cities shows that housing price level in 2007 was not based on high expected appreciation. This lowers the fears for a price bubble.Housing, no-arbitrage condition, overpricing, user cost

The reaction speeds of prices and transaction volume in the Finnish housing market to demand shocks

This article provides new empirical evidence on the dynamics of price movements and transaction volume in the housing market using data from Finland. While the previous related literature studies the reactions of sales volume and prices to an interest rate shock only, we investigate the responses to income and credit shocks as well. Based on an estimated vector-error correction model, the response of prices to demand shocks is found to be substantially slower than that of sales. The effect of a demand shock on sales peaks within a quarter from the shock. The results show that the differences in the reaction patterns to demand shocks can create the kind of strong positive co-movement between price movements and sales and the kind of negative correlation between price level and sales that has been found in a number of housing markets. It is also found that the direct predictive ability of the fundamentals with respect to housing price growth and sales is overwhelmed by the predictive power of the lagged observations on price changes and sales themselves.Housing, dynamics, sales, transactions, prices

Empirical Application of the Housing Market No-Arbitrage Condition: Problems, Solutions and a Finnish Case Study

The housing market no-arbitrage condition is a theoretically sound basis to evaluate if housing prices are misaligned. Unfortunately, empirical application of the no-arbitrage condition has notable complications. This article reviews these complications and suggests some solutions to them. In particular, the use of implied expected appreciation derived from the no- arbitrage condition is recommended. Furthermore, the paper shows that the maintenance costs as a fraction of the housing price level substantially vary in time and location, which may significantly affect the equilibrium housing price level relative to rental prices. An empirical application of the no-arbitrage relation using data from ten cities in Finland shows that the housing price level has not been based on high expected housing appreciation during the 2000s

Response speeds of direct and securitized real estate to shocks in the fundamentals

This paper contributes to the literature by identifying the response patterns of direct and indirect real estate returns to shocks in the market fundamentals. The response speeds are estimated with vector autoregressive models using TBI and NAREIT returns for the period 1994-2009 in the United States. To avoid the potential influence of different property mixes and of leverage on the dynamics, we use sector level data and deleveraged NAREIT returns. The findings indicate that REIT returns lead direct real estate returns even when catering for the property type and for leverage. Our estimations suggest that this lead-lag relationship is due to the sluggish reaction of direct real estate prices to unexpected changes both in the fundamentals and in REIT prices. The findings further suggest that the perceived lead-lag relations are not only due to the slow adjustment of sellers' reservation prices, but also due to the sluggish reaction of demand in the direct real estate market.Vector Autoregressive Models, Generalized Impulse Response Functions, Direct Real Estate, Securitized Real Estate, Dynamics

Do Standard Real Option Models Overestimate the Required Rate of Return of Real Estate Investment Opportunities?

We consider how the inter-temporal discreteness of the revenue and cost processes affect the optimal timing of a real estate investment opportunity in comparison with the investment timing strategy obtained by relying on the traditional continuous real option model. We characterize both optimal investment rules explicitly and show that the continuous model may lead to a significantly higher required rate of return than the discrete model. Hence, our results show that the use of continuous time models leads to smaller and suboptimal amount of investment. Our numerical illustrations also indicate that this difference grows as volatility increases. Consequently, even though higher volatility decelerates investment in the discrete case as well, it decelerates it less than the continuous model would predict.Real options, real estate investment timing, exchange option

Humanitaarinen interventio ja Suomen sotilaallinen kriisinhallinta

Tämän tutkielman tarkoitus on selvittää, voidaanko humanitaarisen intervention käsitteellä kuvata Suomen sotilaallista kriisinhallintaa. Lähtökohta on, että kriisinhallintatehtävien vaarallisuus ja tavoite auttaa kriisien uhreja edellyttävät tämän suhteen avaamista. Tutkimusmetodi on systemaattinen analyysi, jonka lähdekirjallisuutta ovat etiikan, kansainvälisen politiikan ja sotataidon teokset, lainsäädäntö, hallinnolliset asiakirjat sekä mielipidetutkimukset. Kansainvälisesti humanitaarista interventiota on tutkittu paljon; sen luonnetta Suomen sotilaallisessa kriisinhallinnassa vähän. Tutkimuskysymys ratkaistaan välitavoittein: 1) Mikä on humanitaarisen intervention merkitys kriisinhallinnan käsitteistössä?, 2) miten se on oikeutettavissa ja mikä on sen oikeutettu määritelmä?, 3) onko humanitaarisen intervention käsitteellä vastaavuus Suomen sotilaallisessa kriisinhallinnassa ja 4) ovatko kansallinen etu ja kansainvälinen vastuu ristiriidassa päätettäessä sotilaallisesta kriisinhallinnasta? Neljä välitavoitetta vastaa tämän tutkielman neljää päälukua. Ensimmäiseksi osoitetaan, että humanitaarinen interventio on sotilaallisen kriisinhallinnan laji, jolla sotataidon menetelmin voidaan vaikuttaa tehokkaasti vakavaan valtionsisäiseen kriisin. Kansainvälisesti se on yleistynyt perinteisen rauhanturvaamisen vähetessä. Asevoiman käyttö voi olla passiivista tai aktiivista ja siihen pätee samat vaaran ja virheen lainalaisuudet kuin sodankäyntiin yleensä. Toiseksi tarkastellaan 1) kansainvälisoikeudellista, 2) oikeutetun sodan koulukunnan, 3) uusliberalistista, 4) kansalaisjärjestöjen näkökulmaan pohjautuvaa sekä 5) synteettistä oikeuttamismallia. Parhaiten ilmiötä kuvaa synteettinen toiminnallinen oikeuttamismalli, joka perustuu sekä etiikan teoriaan että sotataidon empiriaan. Oikeuttamistarkastelusta johdetaan tämän tutkielman määritelmä: ”Humanitaarinen interventio on valtion tai siihen verrattavan ryhmittymän pakottaminen sotilaallisella voimankäytöllä lopettamaan alueellaan tapahtuvat vakavat ja välittömät ihmisoikeusloukkaukset. Humanitaarisella interventiolla tulee olla kansainvälisen yhteisön enemmistön tuki. Humanitaarisen intervention operaatiotyypit ovat: 1) avun perillemenon varmistaminen, 2) avustusoperaatioiden suojaaminen, 3) uhrien pelastaminen ja 4) pahantekijäin lyöminen.” Kolmanneksi verrataan määritelmän vastaavuutta Suomen sotilaallisen kriisinhallinnan teoriaan ja käytäntöön. Ilmenee, että lainsäädännössä ja hallintokielessä korrektit ilmaisut kuten ´erittäin vaativat kriisinhallintatehtävät´ perinteisen rauhanturvaamisen vastakohtana peittävät yhden tarkoitteistaan, joka sotataidon kielessä on humanitaarinen interventio. Luokitellaan myös puolustusvoimien verkkosivuillaan ilmoittamat kriisinhallintaoperaatiot suhteessa humanitaarisen intervention neljään tyyppiin. Ilmenee, että valtaosa henkilöstöresursseista sitoutuu humanitaarisiin interventioihin tai intervention tyyppejä sisältäviin sekoittuneisiin operaatioihin. Esimerkkinä sekoittuneesta operaatiotilanteesta käsitellään Afganistania. Vähemmistö henkilöstöstä on puhtaissa perinteisen rauhanturvaa-misen tai puhtaissa humanitaarisen intervention operaatioissa kuten EU:n Tshadin operaatiossa. Neljänneksi tutkitaan kansallista etua kriisinhallinnassa hyötyinä yksilölle ja valtiolle. Analysoidaan kansallisen edun ja kansainvälisen vastuun suhdetta, jossa valinnan ääripäät painottavat pelkkää valtion etua tai vain globaalia vastuuta. Ääripäiden keskiväli on eettisen politiikan valinta. Todetaan, että sotilaallisen kriisinhallinnan tulos on mitattava kriisin uhrien näkökulmasta. Tulee ilmi sotataidon perimmäinen kysymys ihmishengen samanaikaisesta itseis- ja välinearvosta, mikä on eettisen harkinnan perusta lähetettäessä kansalaisia kuolemanvaaraan. Globaalia vastuuta ja kansallista etua ei voida ristiriidattomasti sovittaa yhteen päätettäessä sotilaallisesta kriisinhallinnasta. Tämän tutkielman johtopäätös on, että näin määritellyllä humanitaarisen intervention käsitteellä voidaan kuvata Suomen sotilaallisen kriisinhallinnan vaativia tehtäviä perinteisen rauhanturvaamisen vastakohtana. Ilmiön monimuotoisuus edellyttää teoreettista ja empiiristä jatkotutkimusta, jonka tavoite on myös kriisinhallinnan tavoite, – hyveen ja hyvän elämän edistäminen

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