Are House Prices Characterized by Threshold Effects? Evidence from Developed and Post-Transition Countries

We use a nonlinear framework in order to explore house price determinants and adjustment properties. We test for threshold cointegration using a sample of four developed countries (the United States, the United Kingdom, Spain, and Ireland) and four transition countries (Bulgaria, Croatia, the Czech Republic, and Estonia). In addition to testing for nonlinearities, we explore house price determinants in these four transition countries of Central and Eastern Europe. Asymmetric house price adjustment is present in all transition countries and the USA, while no threshold effects are detected in developed European countries. In a threshold error correction framework, house prices are aligned with fundamentals, but house price persistence coupled with a slow and asymmetric house price adjustment process might have facilitated the house price boom in transition countries and the USA.