Housing Stock and Price Adjustments in 12 West European Countries between 1976 and 1999

Housing investment has both a direct and an indirect effect on economic growth. It is therefore of great importance to understand the mechanisms underlying the housing market. This paper uses an error-correction model to analyse the dynamics of the housing markets in 12 West European countries for the period 1976-99. The empirical results indicate that it is, to some degree, possible to consider the European housing market as one market. The relationships between housing stock and its macroeconomic determinants are robust across countries. Furthermore, the results show that the price and cost elasticity of the housing supply are low. Shocks on demand and supply have small effects on the housing stock (low speed of adjustment on quantity). On average, shocks take 4 years before being fully incorporated into the housing stock. On the other hand, shocks have a substantial effect on prices (high speed of adjustment on price). Supply-side and demand-side shocks have an instant effect on housing prices.