Application of Financial Conditions Index on the Swedish Housing Market

The objective of this paper is to study what financial conditions determine the development of Swedish housing activity. For this purpose, this paper explores the possibilities of constructing a monthly financial conditions index (FCI) for the domestic housing activity between January 2009 and September 2021. The housing activity is in turn proxied by housing starts data of only condominiums. A twelve variable FCI is constructed in a principal components framework that constitutes by financial variables from five different financial sub-markets. It appears that the preferred FCI model exhibits an explanatory power of 0.2025 in explaining the future development of housing activity. Moreover, the results of the estimated FCI indicate that the financial conditions of the housing activity are primarily determined by household credit availability and OMX stock market returns. Lastly, a formal forecast evaluation is performed following Box-Jenkins approach and results report that a seasonal ARIMA(1,1,2)(0,0,2)[12] had the best predictive adequacy of future domestic housing activity