An Empirical Analysis of the Nordic Housing Markets: Identifying Indicators of Potential Housing Bubbles and Contagion Between the Countries

Abstract

This study investigates potential housing bubbles and contagion effects in the Nordic housing markets, including Denmark, Finland, Norway, Sweden, and their capital cities. We use the explosive PSY methodology for bubble detection and fundamental analysis to quantify the bubble size. Further, we address the contagion effects between the countries. Our evaluation period covers 2000-2023 for national data and 2010-2023 for the capitals. The explosivity test revealed significant bubble behavior only in Denmark before the global financial crisis. Fundamental analysis highlighted overvaluation in all Nordic countries before 2008. By the end of 2023, Norwegian house prices were overvalued by 6.4%. Swedish and Danish house prices aligned with their fundamentals, while Finnish house prices were undervalued by 10.8%. The contagion analysis indicated that explosive behavior can migrate between the Scandinavian markets.