New residential construction in many countries with rapid urban growth is often interrelated with smaller housing units being built. Sweden is not an exception. It is of interest to investigate the driving forces behind this tendency. Our presumption is that municipal land price policies and building permit regulations might play a certain role in this process. Contrary to previous studies that focus on the number of new dwelling units in housing construction, our purpose is to analyze the average size of new housing units and the factors that affect it on an aggregate level. We apply seemingly unrelated regressions for analysis of the average apartment size in new residential construction in the three largest metropolitan regions in Sweden as a function of the changes in population, apartment rent and prices, mortgage interest rates, land prices, and building permits per capita as a proxy for regulation. The unbalanced panel dataset includes the period between 1998 and 2017 and covers both the rental and the housing cooperative sectors. The analysis demonstrates that land prices and building policies along with market fundamentals are the underlying factors that affect the average size of an apartment in new residential construction in Sweden.

PurposeThis study examines the long term effects of macroeconomic fundamentals on apartment price dynamics in major metropolitan areas in Sweden and Germany.Design/methodology/approachThe main approach is panel cointegration analysis that allows to overcome certain data restrictions such as spatial heterogeneity, cross-sectional dependence, and non-stationary, but cointegrated data. The Swedish dataset includes three cities over a period of 23 years, while the German dataset includes seven cities for 29 years. Analysis of apartment price dynamics include population, disposable income, mortgage interest rate, and apartment stock as underlying macroeconomic variables in the model.FindingsThe empirical results indicate that apartment prices react more strongly on changes in fundamental factors in major Swedish cities than in German ones despite quite similar development of these macroeconomic variables in the long run in both countries. On one hand, overreactions in apartment price dynamics might be considered as the evidence of the price bubble building in Sweden. On the other hand, these two countries differ in institutional arrangements of the housing markets, and these differences might contribute to the size of apartment price elasticities from changes in fundamentals. These arrangements include various banking sector policies, such as mortgage financing and valuation approaches, as well as different government regulations of the housing market as, for example, rent control.Originality/valueIn distinction to the previous studies carried out on Swedish and German data for single-family houses, this study focuses on the apartment segment of the market and examines apartment price elasticities from a long term perspective. In addition, the results from this study highlight the differences between the two countries at the city level in an integrated long run equilibrium framework.

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