The diffusion of housing price movements from centre to surrounding areas

Previous empirical research shows that there are strong interrelationships between regional housing markets in Finland. There are many reasons why housing price changes in central areas may lead housing price changes in the surrounding areas. These reasons include structural differences and economic interdependence between regions as well as informational factors. This paper studies the hypothesis that there is a lead-lag relation between housing price movements in central and surrounding areas. Vector autoregressive and vector error-correction models using quarterly data from the Finnish housing markets from 1987 to 2004 are estimated. The results show that housing price changes diffuse first from the Helsinki Metropolitan Area, the main economic centre in Finland, to the regional centres and then to peripheral regions surrounding them. Inside the Helsinki Metropolitan Area, instead, housing price changes in the suburbs have Granger caused price movements in the city centre.