The Relationship Between House Prices and Stock Prices : An Empirical Analysis of the Swedish Market

Sammanfattning: It is of continual topicality to understand the interaction between the stock market and the house market as they are central parts of the economy and important resources and investment alternatives for both households and firms. Hence, these two markets can be crucial for consumers and investors and consequently economic growth. With a focus on Sweden and Sweden's three largest cities, we examine the relationship between house prices and stock prices by including GDP, inflation and the repo rate over the period 1994-2018. We examine this by using time series analysis and investigating both the short and long run relationship by mainly focusing how the causal link looks like based on the theories of wealth effect and credit-price effect. Our results show a negative long run relationship in Sweden indicating that an increase in house prices decreases stock prices, and for the short run there is evidence of the credit-price effect. For Stockholm, we found a positive bidirectional long run relationship and a bidirectional causality was also confirmed for the short run. For Gothenburg, we find a negative long run relationship where an increase in stock prices decreases house prices, however there is no evidence of a causal relationship in the short run. For Malmö we find a positive long run relationship that goes from stock prices to house prices and the reverse causation is found for the short run demonstrating the credit-price effect. Although we find that these markets have a relationship, we still argue that they are relatively separated and that investors can diversify over these assets because of the low values our results show. Keywords: house prices, stock prices, Sweden, wealth effect, credit-price effect