Developing An Equilibrium Model For Assessing House Price Deviation

Abstract

This article deals with the problem of developing a reliable diagnostic tool that could help in reducing the unpredictability of house price cycles that cause undesirable reverberations in the economy. Such type of cycles is among the main drivers of price volatility and crises not only in the real estate sector itself but also for the financial system and the whole economy too. The purpose of this study is to introduce a step-by-step methodology for assessing the true deviations of house prices from their long-term equilibrium levels. Factors with a significant impact on house price dynamics are also determined. The result is a ready-to-use econometric model that detects possible formation of house price bubbles early enough, so that policymakers and regulators could take adequate actions against market overheating in due time.