House price determinants have been a subject of a growing body of analytical work. The rising interest in the issue is triggered by the increasing role of the housing sector in the economy, as well as by the recent plunge in house prices in many countries around the world.
This paper analyses the recent boom-bust cycle in the housing markets of selected Former Soviet Union (FSU) countries. The analysis is based on a newly constructed database on house prices in the FSU countries. The authors use panel data analysis to estimate equilibrium prices for housing in our group of countries.
They estimate the deviation of house prices from their fundamentals. The model employs a new explanatory variable—workers’ remittances—which, in authors’ opinion, has contributed to the house price booms in some of the countries included in our analysis. They also use foreign inflows as approximation for the availability of mortgage financing in a number of countries. The results show that regular determinants of house prices identified in the research on advanced countries, such as real GDP, also play an important role in the FSU countries.
The findings of the paper are as follows:
workers’ remittances and foreign inflows are important determinants of house prices
house prices are highly vulnerable to the significant drops in remittances and foreign inflows and economic contractions that we have observed during the global financial crisis
deviations of house prices from their fundamentals have not been pronounced, suggesting that house price bubbles, similar to those in certain advanced economies, have not been formed in the FSU countries