Housing is local: Applying a dynamic unobserved factor model for the Dutch housing market

We employ the multi-factor extension of the Otrok and Whiteman (1998) single, dynamic unobserved factor model in order to investigate regional Dutch house price fluctuations for the years 1995-2012. This paper is mainly concerned with two questions: First, is the Dutch housing market localized? Second, to which factors can we trace back this localization? We find that the Dutch housing market is highly localized. Although there is an important common housing cycle explaining house price comovement across all regions, idiosyncratic factors play the most important role. Although notably, group specific factors, separating Randstad of non-Randstad regions, are only of minor importance. Nevertheless, they can explain region-specific housing supply shocks. This latter finding can be partly traced back towards an agglomeration effect for Randstad regions.