Housing price dynamics and elasticities: Portugal's conundrum

Abstract

We aimed to estimate the housing price determinants and elasticities in Portugal's metropolitan areas to help understand the dynamics of the abnormal price increase of the last decade, one of the highest in Europe and the World. We followed a three-step methodology applying panel data and time series regression estimation. First, we estimated the determinants of housing prices at the national and metropolitan area levels. Second, we split the sample by coastal and inner metropolitan areas and estimated the determinants of housing prices and the supply elasticities of each group. Third, we estimated the correlations between housing price growth and elasticities to find whether these determinants correlate. The results showed that at the national level, housing prices are inelastic to aggregate income (0.112). Momentum is the most significant determinant of housing prices (0.760). At the metropolitan areas level, we found an inelastic housing supply, a price-to-income elasticity close to zero, and a more inelastic supply in coastal areas. We found no significant correlation between housing price growth, price-to-income, and supply elasticity. The coastal areas registered housing price growth and a momentum effect much higher than the inner areas, suggesting the existence of dynamic speculative forces that cause prices to move beyond what can be explained by equilibrium models. The present study contributes to the literature on housing price dynamics by showing that the conventional equilibrium stock-flow model does not explain the increase in Portugal's current housing prices, suggesting that other forces (such as economic uncertainty and sentiment) determine the housing price dynamics. The explanation for the housing price growth in Portugal is a conundrum. We believe this knowledge can help define better housing policies at the local and national levels.

Keywords

• housing price dynamics
• elasticities
• housing market determinants