The Housing Market in Israel: Long-Run Equilibrium and Short-Run Dynamics

Yossi Yakhin () and Inon Gamrasni ()

No 2021.08, Bank of Israel Working Papers from Bank of Israel

Abstract: The housing market is characterized by persistent deviations from the long-run equilibrium, and these deviations affect market dynamics in the short run. Therefore, any empirical analysis of the housing market must identify these long-run relations. This paper estimates an econometric model for the housing market in Israel for the years 1980–2019, where the long-run relations are estimated based on the theoretical model of DiPasquale and Wheaton (1992). We utilize the model to learn about the characteristics of the Israeli housing market and about the factors driving home prices, rents, and construction activity during the sample period. The model sheds light on the interaction between home prices and rents: A rise in rents pushes prices higher as it increases the return from home ownership. In contrast, an increase in home prices reduces rents because it stimulates housing supply. We also find that both demand and supply are inelastic in the long run; as a result, external shocks to the market are mainly manifested as changes in prices rather than quantities. As for the factors behind the surge in home prices that started in 2008, the estimation of the model suggests that about half of the rise in prices during 2008–11 was driven by undervaluation of homes in the preceding period. Monetary policy also supported prices during that period, though our estimates suggest that it played a minor role. Supply-side shortage had a moderate but persistent effect on house prices, and starting in 2012 supply shortage alongside rising household income are the main factors supporting prices. The acceleration in construction activity in recent years closed much of the supply shortage toward the end of the sample period.

Keywords: Housing Market; Home Prices; Cointegration; Error Correction Model (search for similar items in EconPapers)
JEL-codes: C22 R21 R31 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2021-05
New Economics Papers: this item is included in nep-cwa and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2021.08.pdf First version, 2021 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:2021.08

Access Statistics for this paper

More papers in Bank of Israel Working Papers from Bank of Israel Contact information at EDIRC.
Bibliographic data for series maintained by Yossi Yakhin ().