House Price Co-Movement and Real Estate Diversification in Europe

The house price boom in major industrialized countries since the early 1990s has been unprecedented. Co-movement is a key feature of it and it has been attributed by scholars to synchronization of monetary policy, financial liberalization, integration of international financial markets, as well as global business cycle linkages. In this paper we focus on seven European countries, all members of the EMU, and ask the question if, in spite of the apparent house price co-movement, there is room for diversification benefits in holding real estate portfolios made up of assets from the seven countries selected. We apply PCA analysis and find that the correlation matrix derived from the volatility of the trend among the house prices of the group indicates negative movements between Germany and each of the other counties, thus pointing to opportunities for diversification in the post-1990 period. In an attempt to give investors further insight by identifying leaders and followers in house price changes, we develop a VEC model and find that German house prices pave the way for changes in the same direction in each of the other countries of the group. EFA Classification Codes: 780, 630 *Corresponding Author Both authors will be presenting