House Price Determinants: Fundamentals and Underlying Factors

This study examines the key drivers of real house prices in the five main Euro area countries (Germany, France, Italy, Spain, and the Netherlands) and the Anglo–Saxon economies (the United Kingdom and the United States) from 1970 to 2010. Estimating the determinants of house prices is very important, as they significantly influence economic activity and financial stability. Therefore, a multivariate unobserved component model, introduced by Harvey, has been used to model house price fluctuations. This technique allows us to catch those price movements that are not fully explained by economic fundamentals. The empirical results, in fact, indicate that in addition to changes in real income, long-run interest rates, stock prices and inflation, the latent component has a significant role in explaining real house prices. The latent component reflects those factors that are not specifically observed, such as structural changes in markets and changing preferences.