A Back-of-the-Envelope Analysis of House Prices: Czech Republic, 2013-2021

Roman Sustek

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: A simple practical method for quantitative analysis of house prices is proposed. Similar to consumer theory, housing demand is decomposed into changes in income and a relative price. The latter includes implicit costs of mortgage finance, determined by monetary policy and future disposable income growth and inflation expectations. The method is applied to the 63% increase in real house prices in Czechia, 2013-2021. The income effect accounts for 32% of the increase, implicit mortgage costs for another 20%. Most of the latter hinges on income growth expectations, reflecting the robust 2013-2020 economic recovery. Going forward, the paper explores hypothetical scenarios in light of the recent increase in mortgage rates to 5.33%. As an example, at long-term inflation expectations of 6%, a dire scenario of zero expected future growth in real disposable income leads to a decline in real house prices of 13%. However, if real income growth expectations remained unchanged from the boom period of 2013-2020, the increase in mortgage rates, at inflation expectations of 6%, would lead to only a modest drop in house prices. Across the various scenarios, the risks for house prices are nonetheless skewed downwards.

Keywords: House prices; decomposition; affordability; mortgage costs; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 G21 G59 R21 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-tra and nep-ure
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