Analysis Of The Czech Housing Market Bubble

The problem of increasing housing prices in the Czech Republic has raised awareness among both the academic and public spheres.The topic gained on the popularity mainly in the last two years,as the price increase started to draw more and more attention.Economists and real estate professionals have been arguing whether there is a rising asset bubble on the Czech housing market or whether the price changes are just a natural consequence of economic and demographic development of the country.This thesis aims to analyze the recent trend on the Czech housing market and draw a connecting line between its development and the macroeconomic perspective of the Czech Republic.The objective of the work can be stated as to summarize the changes on the market,analyze the development of general affordability of housing,explain the prices by macroeconomic fundamentals and test whether the assets on the housing market seem to be overpriced according to three main methods used in the research.The theoretical framework of the work revolves around review of relevant literature and finding optimal methods in order to achieve an optimal testing of hypothesizes.The research itself includes estimation of three benchmarks in order to assess the past and current housing price level.The benchmarks are created using three different methods.The first one is price to income ratio with Hodrick Prescott(HP)filter,which serves for two purposes.Not only the ratio represents the general ability of an individual or a household to purchase a house,but it also serves as a theoretical benchmark which can be used to measure the potential over valuation on market.After analyzing the affordability,another ratio is calculated and analyzed.This ratio compares the housing price and rent and is constructed in order to estimate economic relationship between owning a house and renting a house.This ratio is calculated based on the actual data from the market and later compared to its fundamental value which is represented through user cost equilibrium.The last method implemented in this study is an econometric model which aims to find a relationship between the macroeconomic fundamentals present in the supply and demand equation of the housing and express a linear regression between the housing price and these variables,thus creating a so called fundamental housing price which can be used as a benchmark for prices as it represents a price level,where the actual prices “should be”.After constructing these models,the study then summarizes the findings in order to identify a low level of over valuation on the current housing market as well as it identifies a housing bubble which was experienced by the market in the previous decade.The thesis uses the most recent possible data in order to evaluate the current situation on the market and can be used as a decision making support when considering potential investment in the Czech real estate market.