Regional analysis of housing price bubbles and their determinants in the Czech Republic

Abstract

In this article we focus on factors affecting property prices in the Czech regions. We apply an empirical analysis to identify periods of property price overvaluation by three alternative approaches: using ratios related to house prices (price-to-income and price-to-rent), using simple analysis of time trends in regional dimension (HP filter) and using panel regression. The analysis identified overvalued property prices in 2002/2003 and partly also in 2007/2008. Compared to simple HP filters in the panel regression the size of the housing price overvaluation in 2007/2008 was relatively low, as the rise in property prices in this period was largely determined by fundamentals. Looking across individual region, there is apparent tendency for higher degree of overvaluation in regions with higher property prices. The only exception from this rule is Prague, which, as a capital city, seems to have many “specific” features.