Estonian Housing Market: Searching for Origins of the Boom

Abstract

This paper studies the Estonian housing market, which, being the market with fastest growing prices in CEE, has undergone a rapid growth that has been oft en explained solely by an active convergence process to more advanced European countries. The study seeks to discuss the effects of changes in the economic environment on the Estonian housing market; outline the dynamics of the housing market development and assess this using ratio analysis and the Poterba model. Considering the specific features of the Estonian housing market, the paper further develops the Poterba model. The main question addressed in the study is whether the large price increases in the Estonian housing market can be interpreted as a housing boom. The research results confirm the presence of a price bubble in the housing market, which burst in 2007. The practical and methodological problems identified in the paper might be interesting for people studying similar issues on other emerging markets.