This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector autoregressive model, we find that there is a particulary strong feedback mechanism between prices and turnover.
Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price-turnover correlation.
The result in this paper impy that, to understand price and turnover dynamics, it is important to model prices and turnover als two interdependant processes. There is a considerable bias in the coefficient estimates of standard house price models if this dependency is not explicity taken into account.
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