The effect of rising interest rates on Swedish condominium prices.

Abstract

This study examines the effects of rising interest rates on condominium prices in Sweden using the Vector Error Correction Model (VECM). There have been several studies across the globe that have examined the relationship between house prices and interest rates, while the condominium segment has not been greatly covered. This thesis contributes to the literature by studying monthly data between 2005-2020 for the condominium prices in Sweden. Our findings suggest that condominium prices, when accounting for cointegration of variables and excluding great macroeconomic shocks, are highly sensitive to changes in interest rate and thus changes in monetary policy. The inverse relationship between interest rates and condominium prices are in line with general economic theory that describes the relationship between capital goods and real interest rates. Furthermore, the conclusion of this research suggests that condominium owners face severe risks regarding rising interest rates. However, the model shows great sensitivity to model specifications and major macroeconomic shocks.