Icelandic boom and bust: immigration and the housing market

Lúðvík Elíasson

Housing Studies, 2017, vol. 32, issue 1, 35-59

Abstract: The housing market boom in Iceland in 2004–2007 was driven by international and domestic developments. A simple demand and supply model is fitted to data through the recent boom–bust period. The price equation (demand) is improved by including net immigration as an explanatory variable showing that demographic factors, in addition to mortgage market restructuring, help in explaining swings in the housing market. Evidence of a house price bubble is no longer detected when accounting for the effects of immigration with 1 per cent net immigration yielding a 4–6 per cent rise in house prices. Accuracy in forecasting house price developments is improved by accounting for housing investment behaviour in a separate (supply) equation. The sharp fall in housing investment in 2009 cannot, however, be modelled without the introduction of a dummy variable, accounting for the sudden stop in financing as the Icelandic banking sector failed in late 2008.

Date: 2017
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Working Paper: Icelandic boom and bust - Immigration and the housing market (2014)
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DOI: 10.1080/02673037.2016.1171826

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