The aim of this paper is to study the effect of interest rates on house price changes in Sweden for the case of one and two dwelling buildings. Basically, three procedures were used for analysis. First, correlation analysis was used to investigate and test if there has been any relationship between interest rates and house price in Sweden in the past two decades.
Second, multiple regressions analysis with consideration of hetroskedasticity autocorrelation or HAC (newey-west standard) errors was applied to test the impact of changes of interest rates on house price. Finally, distributed lag model was applied to examine the impact of interest on house price through time.
The result shows that there is strong inverse relationship between interest rates (governmental bond rates, mortgage bond rates, lending rates and repo rates) and housing price index. The regression coefficients show that the decrease in the interest rate is followed by corresponding increase in the housing price index for all the given interest rates.
The other finding is that more than 92 percent variation in the housing price index is explained by changes in interest rates, changes in net house hold disposable income, inflation rate and supply.
The result also shows the lag effects of changes of interest rates on housing price. The major implication of this study is that fluctuations in interest affect homebuyers, home sellers, household incomes and investors. The study also suggests that further detail investigation on house price dynamics is crucial for monetary policy.
Author: Getahun, Habtewold Demewe