Greece Macro Monitor (10 Μarch 2014)
Explaining and forecasting residential house prices in Greece
A technical note
The present paper – which please see herebelow, utilizes cointegration analysis and a vector error correction model (VECM) to explain and forecast residential house prices in Greece, based on quarterly data spanning the period Q1 1995 to Q4 2013. In line with a number of earlier empirical studies, we document the existence of a cointegration relationship, which links real house prices, real GDP, the real mortgage loan rate and inflation. Furthermore, our VECM estimates suggest that, in the long-run, housing prices are positively related to real GDP and negatively related to both real lending rates and inflation. Finally, an out-of-sample forecasting exercise based on the estimated VECM coefficients points to a further decline in nominal residential house prices by between 6 and 12 percent, with a bottoming out of the recession in the domestic residential property market expected by early 2015 under the assumed baseline scenario (and by early 2016, under an adverse scenario).