Is the Oslo housing market overpriced? An empirical study assessing Oslo housing market prices based on its fundamental determinants

Abstract

Fluctuations in housing prices have large repercussions on the economy. A housing bubble burst could have adverse consequences for households and investors. In this paper, we discover fundamental determinants in the pricing of the Oslo housing market. We examine the dynamics of their relationship in both the long- and short-run with a vector error correction model. The predominant factors found to explain house prices are average income and lending rate. Shocks to both variables exhibit permanent effects on house prices. If prices deviate from their long-run equilibrium in the short-run, prices are adjusted by 12.5% per quarter. Based on fundamental determinants, the long-run results indicate no signs of overvaluation of house prices in Oslo.