What Drives Returns To Euro Area Housing? Evidence From A Dynamic Dividend-Discount Model

The authors apply a dynamic dividend-discount model to analyse unexpected housing returns in a panel of eight euro area countries which together comprise 90% of euro area GDP. The application of this model allows for a decomposition of house price movements into movements in rent (cash-flow) and expected return news components. The empirical application of the model involves the estimation of a panel Vector AutoRegressive model (VAR) for four variables - excess return to housing, rents, the real interest rate and real disposable per capita income - using quarterly data over the period 1985-2007.