Macroeconomic and Institutional Determinants of Sustainable Housing Markets in the European Union: A Dynamic Panel Analysis

Abstract

This paper examines the determinants of real house prices in 24 European Union countries using annual panel data for 2005–2024. The dynamic framework relates real house prices to GDP per capita in purchasing power standards, lagged inflation, employment as a share of total population, private-sector credit flows as a share of GDP, the logarithm of aggregate tourism receipts, annual changes in urban population, and property rights protection. A Fixed Effects specification serves as the benchmark. Tests reveal pervasive cross-unit interdependence, while Pesaran’s CIPS test indicates a mixed order of integration, with both I(0) and I(1) variables. These findings support second-generation panel estimators. The Dynamic Heterogeneous Panel Model is the main estimator, and the Augmented Mean Group estimator provides a robustness check. The baseline results show strong persistence in real house prices. GDP per capita, employment, private-sector credit flows, and annual changes in urban population have positive effects, whereas lagged inflation, tourism receipts, and property rights protection have negative effects. AMG estimates broadly confirm this pattern. However, annual changes in urban population remain positive but lose statistical significance under AMG, unlike in the baseline model, where the effect is positive and significant when country-specific trends and greater heterogeneity are allowed for. Overall, EU housing markets are shaped mainly by macroeconomic fundamentals and financial conditions. Their long-run sustainability also depends on financial stability, housing affordability, and institutional predictability, with institutional quality appearing to play a stabilizing role. Urban population changes matter, although their effect is weaker and less robust across specifications.