Housing investment in Finland

The high volatility of both housing investment and housing prices has raised questions about the determinants of housing investment in Finland. In this paper we estimate investment equations for the period 1972 -1987. The exceptional durability of houses makes housing investment sensitive to interest rates as well as to changes in the liquidity constraints due to money market liberalization during the 1980's. Here, we confirm the applicability of Tobin's q theory of investment as an explanation for housing investment. Therefore housing investment can be successfully and sufficiently explained with the ratio of nominal housing prices to their construction costs. However, we observed structural changes in the model of housing investment and the q theory gives a better description for supply of houses in the latter half of the estimation period 1980-87.